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 house holds and the taxation of returns from capital. Specifically, the effects o f reducing transfers to low income families by US$10 billion and balancing the ensuing federal budget surplus by increasing the preferential tax treat ment of capital gains for individual taxpayers are examined. We examine how this combined budget-neutral fiscal policy change affects agricultural pro duction, economy-wide welfare and the consumption of food. Our results indi cate reducing the distortion between the taxation of capital and labour inc reases economy-wide efficiency leading to increased consumption of food by all income classes. Although economy-wide food expenditures increase, offse tting the revenue shortfall from a reduced capital tax by decreasing transf ers to low income families reduces food expenditures for the two lowest inc ome groups by nearly US$1 billion.