Americans are receiving tax refunds from Uncle Sam, but to farmers, the checks are pocket change compared to what they'd keep if Congress adopted a federal flat tax, says Christine Wilson, Purdue University agricultural economist.
She estimates a $5,000 or more tax savings for many producers if a 20 percent flat-tax rate were enacted. Wilson crunched the numbers in "The Effects of a Federal Flat Tax on Agriculture," a study she conducted in part with Allen Featherstone, an agricultural economics professor at Kansas State University.
The study compared federal income taxes that Kansas farmers paid under the current graduated-tax system with what they would have paid if a flat tax were in place. Findings were based on information that farmers in sole proprietorships provided between 1990 and 1994.
"Under the flat-tax system, about 63 percent of the producers we looked at would pay lower taxes, and their taxes would be about 21 percent lower," Wilson notes.
"We were able to look at 593 producers– of those, 376 would experience an average total tax cut of more than $100. That group would experience a total average savings of about $5,500. Another 199 would experience a tax increase of a little bit more than $100."
Unlike a graduated- or progressive-tax system in which marginal tax rates increase as taxpayers move into higher income brackets, a flat-tax system taxes wage earners the same percentage regardless of income level. Proponents say filing would be much easier, with less paperwork.
The study included farmers in the 15 percent to 39.6 percent tax brackets. In addition to income, the economists factored in the farmers' ages, number of dependents, assets, debts, crops/livestock produced and a 15.3 percent Social Security tax, among other things.
The study concluded that larger and more profitable farms benefited most from a flat tax. Highly leveraged farms (those with greater debt-to-asset ratios) likely would realize smaller tax savings or tax increases.
In an example involving a typical producer with gross farm income of $392,923, Wilson found that even with standard deductions and income adjustments, the farmer paid $13,807 in income and self-employment taxes under 1990 tax law. The same farmer would have owed $10,787 under a flat tax system.
Farmers would notice other significant changes from a flat tax. "They wouldn't be able to deduct interest expenses, and they wouldn't pay on the interest that they make," Wilson says. "Another thing we estimate would happen, depending on interest rate changes, is land prices would increase."
Economists say interest rates would fall in a flat tax system, as interest taxes would disappear. Some economists predict rates could drop by as much as 25 percent. Wilson's calculations suggest a 25 percent interest rate decline would push land values up 30 percent. Conversely, land values likely would plunge if interest rates remained unchanged in the face of a flat tax.
"If interest rates fell by 25 percent, our study shows that instead of 63 percent of producers benefiting from a flat tax, 90 percent of the producers we looked at would benefit in terms of taxes paid," Wilson says.
The study also found:
- Farmers in high-income brackets likely would make fewer equipment purchases because a flat-tax system doesn't include interest deductions, and assets are fully taxed when sold.
- In the five-year study period, beef producers would have paid less taxes than non-irrigated crop farmers under a flat tax because their taxable incomes were generally lower.
- Dependents had little affect on tax liability in either the graduated- or flat-tax systems.
Flat-tax legislation was introduced in Congress in 1999, but stalled on Capital Hill. Wilson expects a flat tax bill to come before Congress again. But even if lawmakers began debating the issue tomorrow, it would be years before the graduated system would be scrapped in favor of a flat tax.