Due to an increasing variability in farm income because of extreme weather conditions and higher market volatilities, the German Farmers Association demanded the introduction of income equalization deposits for agricultural income to avoid a progression-based extra tax load and to support farmers building reserve funds. This article examines the economic effects as well as the legitimacy according to German tax law and its administrative practicability. Fundamentally, smoothing income over several years is admissible according to the German ability-to-pay principle. Nevertheless, a restriction to a particular group of tax payers is only acceptable if special circumstances faced by this group seem to make it necessary. This constraint demands restrictions on deposit and withdrawal which are linked to specific agricultural difficulties. Due to a couple of problems and difficulties in definition, measurement and valuation on an on-farm level, the administrative feasibility of these restrictions is limited. Different types of profit assessment for farmers complicate a fair and straight-forward usage. It is uncertain if income equalization deposits will be a useful risk management tool for farmers while simultaneously meeting all legal requirements in German tax law.
