Subsidies have been a staple in U.S. agriculture since 1933 when the Great Depression led to the adoption of the Agricultural Adjustment Act, the nation’s first comprehensive food policy legislation.

The basic premise behind agricultural subsidies is to supplement on-the-farm income, thereby allowing small, family farms to compete with large agribusiness operations and/or foreign producers who experience economies of scale or other production advantages. On the surface it appears to be a noble cause.

However, there are two problems with farm subsidies: 1) private businesses are being supported by public funds and 2) the intended beneficiaries are not the ones receiving the subsidies.

U.S. Senate candidate Dr. Rand Paul is taking some heat over his recent comments concerning farm subsidies. Appearing on a Kentucky Educational Television debate, Paul said, “I don’t think federal subsidies of agriculture are a good idea … They often go to large corporate farming and I’m not in favor of giving welfare to business.”

That’s a stark contrast from Hopkinsville Rep. Ed Whitfield’s position. Whitfield brought home $89 million in farm subsidies last year.

If my time in agriculture, both professionally and educationally, has taught me anything it’s that Paul is unequivocally correct.

In 2009, the top 1 percent of Kentucky farms collected 22 percent of the subsidy payments, with an average payment of approximately $66,000 per recipient. For example, Seven Springs Farms in Cadiz received almost $370,000 in subsidies despite having an operation of over 19,000 acres. To put this into perspective, the remaining 80 percent of farm operations received only 17 percent of the payments.

It’s hard to argue against the intentions of agricultural subsidies, especially when the image of the idyllic farm struggling to make ends meet comes to mind. Unfortunately, that idyllic farm image is long gone, yet the subsidies that accompany it still remain.

The American Legislative Exchange Council (ALEC) and supply-side economist Art Laffer recently released their third edition of “Rich States, Poor States,” which evaluates states’ economic competiveness.

Considering its economically stifling policies, it’s not surprising that Kentucky ranks No. 40,(“1″=best,”50″=worst). If I can do simple math and there are still only 50 states (in contrast to President Obama’s reference to “57 states”), then No. 40 out of 50 isn’t too swell. To be precise, despite the fact that Kentucky’s ranking is up from No. 44 in 2008, it remains mired in the bottom 20 percent of states.

States that spend — and tax — less experience greater economic growth. Considering Kentucky’s top marginal personal income tax and corporate income tax rates are the ninth- and 18th-highest respectively, its dismal ranking is well deserved.

On top of the high tax rates, state government was forced to rely on $500 million in federal stimulus funding to balance the budget approved during May’s special legislative session. It’s clear: We’re spending beyond our means.

High taxes and overspending are the main ingredients in the recipe of downtrodden economies.

Kentucky currently has an illogical tax structure that’s highly dependent on income taxes and less so on sales and property taxes, especially at the local level. The disproportionate nature of income taxes to property taxes in Kentucky — especially relative to border states — favors people who hold their wealth as property and hurts people whose main source of wealth is their human capital.

Kentucky’s tax structure actually mitigates its own efforts to attract hi-tech businesses and young, highly educated workers. After all, who wants to see their individual or corporate earnings taxed excessively?

As a rule of thumb, local economic activity is more sensitive to changes in state taxes than federal taxes, in part due to the interstate mobility of capital and labor. For example, when given a choice, high income households choose to live in our border states that tend to have lower income taxes. This is particularly true along our Tennessee border.

A report done by The Beacon Hill Institute suggests that had several states applied a state FairTax, in contrast to their current system, they would have experienced tremendous growth in employment numbers and real gross annual wage rates between 2005-2009.

For example, employment in the border states of Illinois and Virginia grew by more than 15 percent in both of these states; real gross annual wage rates grew by 3.7 percent and 6.2 percent in Virginia and Illinois, respectively. It seems likely that Kentucky could experience similar strong growth if we emulated their tax policies in this regard.

While the tax structure in Kentucky is not the only thing keeping citizens from moving here, it sure isn’t helping matters. The idea of a state-level FairTax may be the ticket to attracting businesses and educated workers to the commonwealth by creating jobs and improving earnings.

The FairTax is a proposed change to federal tax laws that would repeal all federal income taxes, including personal, corporate, capital gains and estate taxes, and replace them with a national retail sales tax. The proposed legislation would apply a sales tax rate of 23 percent on the transaction value of any new purchase or service.

A 23 percent rate may seem high – especially to low-income earners for whom consumption accounts for the largest portion of their take-home wages. However, it’s low-income and middle-income families who will benefit the most, thanks to the “prebate” system, which would eliminate the taxation of household necessities and make a fair tax plan more progressive.

Families would pay taxes on goods and services only if they spend above the poverty level. The amount that families would be able to spend tax free would depend on their size. For example, a family of four would be able to spend up to approximately $24,240 annually tax free.

The rebates would have the greatest effect at low spending levels, where they could lower a household’s effective rate to zero or below; at higher spending levels, the rebate has less impact.

*the effective tax rate is the rate of taxes paid post-prebate to expenditures (i.e. $6,803/$50,000)

The FairTax would see many Kentuckians benefit because of the low-income nature of the state. Kentucky currently has the fourth lowest median income in the U.S. with a median income of $41,458.

This means that many Kentuckians would see a reduction in the amount of taxes that they pay and thereby allowing them to keep more of their paycheck. With more discretionary income available, citizens across the commonwealth will be free to spend, invest and save at their choosing.