sealPurdue News
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July 23, 2001

Ag economist: Read my lips – flat tax system better
for farmers

WEST LAFAYETTE, Ind. – Millions of Americans are receiving tax refunds of as much as $600 from Uncle Sam this summer. To farmers, the government checks are mere pocket change compared to what they'd keep if Congress adopted a federal flat tax, says a Purdue University agricultural economist.

Christine Wilson estimates a tax savings of more than $5,000 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, a Purdue graduate and agricultural economics professor at Kansas State University.

The study compared the federal income tax Kansas farmers paid under the current graduated tax system with what they would have owed if a flat tax were in place. Findings were based on information 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 said.

"We were able to look at 593 producers. And of those producers, 376 would experience an average total tax decrease 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 go up as taxpayers move into higher income brackets, a flat tax system taxes wage earners the same percentage regardless of income level. Proponents say taxpayers could file returns on a form the size of a postcard.

Wilson's study included farmers in the 15 percent to 39.6 percent tax brackets. In addition to income, she factored in farmers' ages, dependents, assets, debts, crops/livestock produced and a 15.3 percent Social Security tax, among other things.

The study concluded 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're not going to be able to deduct interest expenses, and they're not going to pay on the interest that they make," Wilson said. "Another thing we estimate would happen, depending on whether or not interest rates change, is an increase in land prices."

Economists say interest rates would fall in a flat tax system, as interest taxes are eliminated. Some economists predict rates could drop by as much as 25 percent, Wilson said.

Wilson's calculations suggest a 25 percent interest rate reduction could cause land values to jump 30 percent. Conversely, land values likely would plunge if interest rates remained unchanged.

"If interest rates did decrease by 25 percent, then our study indicates that instead of 63 percent of producers benefiting from the flat tax, about 90 percent of the producers we looked at would benefit from going to a flat tax system in terms of taxes paid," Wilson said.

Her study also found that:

• Farmers in higher income brackets likely would make fewer equipment purchases because interest deductions are removed in a flat tax system and assets are fully taxed when sold.

• In the five-year study period, beef producers would have paid less in 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 by U.S. Rep. Dick Armey, R-Texas. The bill called for a 19 percent across-the-board tax rate the first year and 17 percent in subsequent years. Armey's legislation, which left the Social Security tax untouched, stalled on Capitol Hill.

This spring, President Bush signed a 10-year, $1.35 trillion tax cut package. The plan lowers the top marginal tax rate from 39.6 percent to 35 percent and creates a new 10 percent income tax bracket. In addition, a portion of the federal budget surplus is refunded to taxpayers.

Wilson said she expects a flat tax bill to come before Congress again. But even if lawmakers were to begin debating the issue tomorrow, it could be years before the graduated system were scrapped in favor of a flat tax, if it happened at all, she said.

"Tax changes go awfully slow," Wilson said.

Source: Christine Wilson, (765) 494-4299; wilson@agecon.purdue.edu

Writer: Steve Leer, (765) 494-8415; sleer@aes.purdue.edu

Purdue Ag Communications: (765) 494-2722; Beth Forbes, Ag News Coordinator, bforbes@aes.purdue.edu; http://persephone.agcom.purdue.edu/AgCom/news/

Purdue News Service: (765) 494-2096; purduenews@purdue.edu


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