Posted: Jun 03, 2005 By: Rubingh's Dairyland

Subject: Save the Family Farm

Comment: Save the Family Farm–Pass the FairTax
I am concerned about the trend that is happening with farm size. I have seen many articles describing the demise of the family farm. The farms keep getting bigger and the small ones go out of business and get sold. There are seldom very many reasons given as to why the small farms are becoming extinct. One reason given is that the larger farms are more efficient. While that may be a part of the reason, I believe that the current tax system has a much greater impact on the family farm than any other single factor. Let me explain.
In any business including a farm, the most likely ones to remain in operation are those that are making a profit. With farming, there is a lot of fluctuation in income. Prices fluctuate and the weather changes, affecting the yield and therefore the profit. Let me present a scenario: One year the crops are poor and prices are down. The farmer does not make a profit. He still has to buy the inputs - seed, fertilizer, supplies, etc. He still has to hire the tax consultant and do all the paperwork and tax management. This farmer will be depressed and not have the desire to continue. The next year the farmer has excellent crop yields and the prices are good. The inputs are about the same price as the year before. However, this time the tax consultant figures out his tax costs and finds out that of the last dollar earned, the farmer must pay 54% of it in the various taxes including: 15% Social Security, 30% Federal income tax, 4% state income tax, and 3.5% PA 116 property tax. The farmer then asks himself why he is working so hard if over half of the income goes to the government.
Now the farmer does have some alternatives in the current system to paying all those taxes. If he gives extra money to charity, then the tax rate is reduced by 34%, but the social security tax still must be paid - (charitable contributions are not even fully tax deductible!). Another option the farmer has is to build a barn or buy a piece of equipment. The farmer often goes this route even though the capital item is not needed to be more efficient. Usually after the capital item is bought, more land or more animals are needed in order to either help pay for or utilize the new asset. Therefore, in many cases as in the one described, the current tax system “forced” the farmer to get bigger and buy out a neighbor's family farm.
A similar scenario would be the farmer who borrows money to become more efficient, and then when the depreciation runs out (usually about the same time that the majority of the loan is paid back and therefore the interest payments are reduced), suddenly there is a profit shown on the income tax forms. Then the farmer must either pay a large tax bill or borrow more money and expand. This often puts the farmer past his most efficient size or his best capability.
Now comes the FairTax. The FairTax would give the farmer full control of how he spends his money. If there is no profit one year, then the prebate from the government would supplement the business and keep it going a while longer. But more important, if there is a profit, the farmer would pay no tax on that profit. He would only have to pay tax if he uses the money for personal expenditures such as new furniture, a new car, or other new goods or services. This means that the farmer would purchase new inputs only if they would benefit the business. That would be much more beneficial for both the farmer and for the economy.
The farmer would then probably spend more of his profit on goods and services to his own enjoyment and less on expanding the business for the sake of reducing taxes. The FairTax is by far the best tax reform solution to preserving the family farm.