THE INCIDENCE OF FARMERS' PERSONAL INCOME TAX PREFERENCES

Income taxes became important to farmers in the early 1940s. The structural change that followed left larger farms and fewer farmers. These changes may have resulted from a number of factors, such as economies of scale, changing attitudes, and government commodity programs, but income tax preferences for large, successful farmers may also have contributed to this structural change. Because farmers are treated uniquely in the United States personal income tax system, they can lower their tax liabilities in ways not generally available to nonfarmers. To determine the true impact of these preferences on farming and the economy, we need to know whether these preferences rest with the tax-paying farmer or whether they are shifted to consumers through lower commodity prices. Multiple regression shows the incidence of these preferences when we add a tax variable (to the independent variables usually used to explain the agricultural rate of return) and examine its coefficient. Our statistically significant coefficient for the tax variable indicates that taxes and preferences are shifted to consumers. However, all farmers do not benefit equally from income tax preferences: a farmer paying no tax gets no benefit, but high income investors may initially reap large benefits from tax preferences. Shifted preferences lower industry commodity prices but producers gaining large benefit from preferences may still produce profitably, after taxes, while producers receiving no tax preference benefit will lose selling commodities at new lower industry prices and will ultimately stop producing. Our study shows that farm tax preferences are largely shifted to consumers in the first year through lower commodity prices. Farms expand, and some new investors enter the sector to utilize tax preferences, more fully, while some marginal producers leave farming. By the third year, after taxes have decreased, enough producers have left farming to raise farm commodity prices slightly. On a macroeconomic level, regressive tax preferences lower the progressivity of the personal income tax rate structure. On the farm, the indirect impact of regressive tax preferences can be a decisive factor causing marginal producers to leave farming.