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Proposal for a more efficient subsidy system for organic farming: Potential use of the tax system within the European Union

Published online by Cambridge University Press:  12 February 2007

Enno Bahrs
Enno Bahrs*
Affiliation:
Institute of Agricultural Economics, University of Göttingen, Platz der Göttinger Sieben 5, D 37073, Göttingen, Germany.
*
*Corresponding author: ebahrs@gwdg.de
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Abstract

Agricultural enterprises that are run on ecological principles receive, in some countries, higher levels of financial support from the European Union (EU) than other agricultural businesses. The aim is to provide an incentive for businesses to adopt organic farming systems, a change desired by both politicians and society. However, with a fixed system of support payments based on land area, increasing the proportion of farms being run organically leads directly to higher costs of subsidies for the EU and the individual countries. This becomes especially true if enterprises with large land areas, high turnover and high income are converted to organic farming methods. Because financial resources within the member states are in very short supply, a modification of the current system of subsidies would seem to be necessary in the near future. The aim of any new system should be to reduce profit windfalls without making a drastic reduction in the incentive effect of the current system. At the same time, businesses that can run along these lines on a sustainable basis should be especially supported. This requires an increased level of individual assessment of the potential of the subsidized enterprises in relation to their cost–performance ratio for organic agricultural production. In this connection, a partial change to profit-based tax systems can be used as an effective instrument for co-financing. The method used to calculate profits for tax purposes, which varies from state to state, can be used to assess the performance and success of the organic farmer. Tax-free allowances or reductions in tax rates could be used to provide a selective subsidy method. The ability to relate subsidies to performance, thereby reducing windfall profits, is not the only advantage of using the tax system for this purpose. Another advantage is the low transaction costs. Using the example of the offsetting of profits between time periods, it will be shown here that the tax system can be used as an additional instrument for subsidization. The existing methods of subsidy can only be supported in this way, not completely substituted.

Keywords

subsidywindfall profitsperformance principletaxes on profitsoffsetting of profits between time periods
Type
Research Article
Information
Renewable Agriculture and Food Systems , Volume 20 , Issue 3 , September 2005 , pp. 148 - 154
Copyright
Copyright © Cambridge University Press 2005

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