Federal tax policy plays an important role in the well-being of farm and rural households and the viability of farm operations. In recent years, Federal income taxes on both farm and nonfarm income accounted for nearly two-thirds of the farmer's total Federal tax burden, while Social Security and self-employment taxes represented nearly a third. These taxes can have a significant effect on the financial well-being of farm households, with impacts varying by farm household type. Beyond a farm operation's income, the tax code influences farm management and other decisions, such as capital purchases and dispositions, and farm estate planning. The tax code can also affect eligibility for Federal program payments, because they are linked to measures of adjusted gross income (AGI).
The Federal tax code can also have a significant impact on the well-being of rural households. Rural households have lower incomes and are more likely than urban households to live in poverty, and the tax code assists low-income families through refundable credits, particularly families with children.
ERS research focuses on the most important features of Federal tax law and how they affect agriculture and the broader rural economy, and analyzes the impact of significant tax reform and other tax proposals. ERS also conducts research related to the use of the Federal tax system for the delivery or targeting of farm program benefits, including income caps for farm program payment eligibility.
ERS research indicates that:
- Changes in Federal tax provisions affecting both individual and business income taxes have reduced average tax rates for all farm households, while increases in the amount of property that can be transferred free of estate tax has greatly reduced the number of farm estates subject to the Federal Estate and Gift tax and the amount of tax owed. See The Potential Impact of Tax Reform on Farm Businesses and Rural Households (EIB-107, February 2013) for more information.
- The expanded use of tax credits, such as the earned income and child tax credits, has provided a substantial boost in income to low- and middle-income rural taxpayers and has reduced the rural poverty rate. See Rural America Benefits From Expanded Use of the Federal Tax Code for Income Support, in the June 2011 Amber Waves.
- The current income caps on eligibility for farm program payments affect only a small number of farm payment recipients each year and the impact varies by farm type and organization structure. See Effects of Reducing the Income Cap on Eligibility for Farm Program Payments (EIB-27, September 2007) for more information.