“It’s like putting your kid on a diet and telling him that he absolutely can’t eat more than one pound of sugar a day.”
That’s how one USDA official in Minnesota characterized the $275,000 limit on annual subsidy payments to farmers contained in a farm bill approved Wednesday by the Senate.
The official is not being cynical, just realistic.
In the current program, the bulk of federal subsidies goes to a small percentage of farmers with large operations, but most of them get less than $275,000 per year. Thus, the new payment limitations will have little negative effect on most large farms.
Moreover, the fight to get even this symbolic measure included shows the difficulty in passing farm legislation that doesn’t favor big farms. It also shows the struggle by those who want to see government action reduce income and social inequality rather than increase it.
This gets to what economists mean by the terms “regressive” and “progressive.”
Originally applied to taxes, a progressive tax is one in which the proportion of income paid in a specific tax is higher for high-income people than for poorer ones. A regressive tax is just the opposite — that is, poor households pay a bigger percentage of their income than do wealthier ones.
Real estate taxes are a common example of a regressive tax. Yes, a couple with a 6,000-square-foot home in North Oaks pays a bigger real estate tax bill than does a blue-collar young couple with 1,400 square feet on the East Side. But compared to their total income or net worth, the real estate tax takes a bigger bite for the East Siders than for the suburbanites.
Applying this idea more broadly, any policy that gives money to people who are richer than the average of taxpayers who provide the tax is said to be regressive.
In other words, a regressive policy makes income distribution in the country less equal rather than more equal.
Agricultural income support programs certainly are regressive. The average income of all farm households isn’t much different than for all U.S. households or for all U.S. taxpayers.
But the bulk of the federal farm payments — two-thirds or more — go to the largest 10 percent of all farms. These are operations whose owners have incomes and net worths much above the national average.
In a reversal of Robin Hood’s approach, these programs take money from the poorer and give it to the richer. This is well known to agricultural economists, USDA officials and agricultural journalists.
It is condemned by think tanks on both the political right, such as the Heritage Foundation, and on the left, such as the Environmental Working Group. Why do we have such policies then?
They’re enacted because of two factors: broad political support for assistance to farmers and the powerful influence large farm operations have within Congress.
Most crop farms get some sort of federal aid. For many, it isn’t much in absolute terms, but the recipients are loath to give it up. They, and their sympathetic relatives in urban areas, aren’t aware of how terribly skewed farm payouts are.
Many owners of smaller farms rightfully feel that finances are tough right now and their net incomes are lower despite the $3,000 or $5,000 federal check they get each year.
Few realize that times are tough for small operations because of the federal payments — not to them, but to the larger operations.
Why? Federal crop programs reduce risk for large operations and increase output overall. That drives grain prices lower than they would be if there were no programs at all. Smaller operators see the tangible dollars they get from the government but don’t perceive that the “market” prices they find inadequate are low because of government action.
They therefore continue to support politicians who promise extension of the programs.
Meanwhile, large operations have a large voice in congressional committees because of the political contributions they make.
The outcome is inefficient because it wastes resources and unfair because money flows from poorer households to richer ones while doing little to aid the poorer half of all farmers.
But before you cluck too loudly in disapproval, consider that allowing the deduction of mortgage interest on federal tax returns is analogous.
Someone with a $70,000 mortgage on a modest home and who is in the 15 percent tax bracket gets a tax reduction of a few hundred dollars. Someone else with a $2.2 million dollar mortgage that is in the top tax bracket saves tens of thousands of dollars.
This implicit subsidy is unfair. It effectively makes household incomes more unequal rather than less, much like the farm programs. But it’s even more of a political sacred cow.
© 2002 Edward Lotterman
Chanarambie Consulting, Inc.