Changing fiscal federalism in the United States: effects on agriculture and food consumption
This study examines the effects of the changing fiscal role of the federal government with respect to providing financial support for low-income households and the taxation of returns from capital. Specifically, the effects of reducing transfers to low income families by US$10 billion and balancing the ensuing federal budget surplus by increasing the preferential tax treatment of capital gains for individual taxpayers are examined. We examine how this combined budget-neutral fiscal policy change affects agricultural production, economy-wide welfare and the consumption of food. Our results indicate reducing the distortion between the taxation of capital and labour increases economy-wide efficiency leading to increased consumption of food by all income classes. Although economy-wide food expenditures increase, offsetting the revenue shortfall from a reduced capital tax by decreasing transfers to low income families reduces food expenditures for the two lowest income groups by nearly US$1 billion.