A Study of the Impact of Special Interest Groups on Major Tax Reform: Agriculture and the 1913 Income Tax Law
Barney, Douglas K., Flesher, Tonya K., Accounting Historians Journal
Abstract: Farmers have benefited from unique tax treatment since the beginning of the income tax law. This paper explores agricultural influences on the passage of the income tax in 1913, using both qualitative and quantitative analysis. The results show that agricultural interests were influential in the development and passage of tax/tariff laws. The percentage of congressmen with agricultural ties explains the strong affection for agriculture. Discussion in congressional debates and in agricultural journals was passionate and patriotic in support of equity for farmers. The quantitative analysis reveals that the percentage farm population was a significant predictor of passage of the 16th Amendment by the states and of adoption of state income taxes in the 20th century.
Tax legislation is a political process, with taxes levied and collected both to raise federal revenues and to achieve social goals. Numerous researchers have addressed the forces influencing tax policy during the 19th and early 20th centuries. This study provides a different perspective by exploring the contributions and considerations of agriculture in the development of our modern income tax laws.
Looking at the results of current income tax laws, it appears that agriculture is considered a distinct sector of society when Congress debates tax policy. There are many examples of preferential tax treatment for farmers. For example, only farmers can use income averaging and elect the cash, accrual, or crop methods of accounting. (1) (Under the crop method, the entire cost of producing the crop must be taken as a deduction in the year in which the gross income from the crop is realized and not earlier.) Comparing two individuals, one a farmer and one a non-farmer, the non-farmer, on average, pays more in federal income taxes than does a farmer with similar income. This disparity results mainly from the opportunity for farmers to convert ordinary income to capital gain and the use of the cash method of accounting. How did farmers get these tax privileges? Searching for the answer to this question should provide insights as to how special interest groups may gain advantages in the current debate over tax reform.
Several studies provide the theoretical background for this research. Hansen  points out that party leaders have only one objective--election, and that politicians assume that voters will respond to changes in their incomes induced by the government--taxes. Further, party leaders have two major considerations in the formulation of tax policy. The first is to raise revenue for the government. Second, party leaders use tax policy to distribute burdens and benefits across the electorate. In the Hansen study and in this research, "a closer examination of these two characteristics yields a number of predictions about the forces that shape the politics of tariff [tax] revision" [Hansen, 1990, p. 531]. Two propositions follow: (1) political parties adopt ideological positions on tax policy that correspond to the impact on their partisans; and (2) parties amend their tax-policy positions to reflect changes in the proportions of voters upon whom the heavier tax burdens rest in order to reflect the relocation of the political center [Hansen, 1990, p. 534]. One of the applications of these propositions is that parties adopt ideologies that match the interests of their core supporters, as will be shown in the later discussion of the history of the tariff and income tax [Hansen, 1990, p. 535]. Epstein and O'Halloran [1996, pp. 301, 319] concluded that the interests that lobbied government for favorable policies and the political parties that mediated these demands did significantly affect tariff policy from 1877-1934. Political "parties affected the manner in which interests were translated into policy outcomes by aggregating interests through coalitional politics...." "With the adoption of the Sixteenth Amendment in 1913 the United States entered the modern age of special-interest politics" [Baack and Ray, 1985, p. …