EU farm spending, worth almost 60bn euros (£51bn) annually, should no longer be based on previous subsidy levels for farmers, the European Commission has said.
But subsidies are still needed to protect Europe's food supplies and rural diversity, it believes.
The proposals are contained in an EU blueprint for farming beyond 2013.
Critics say too much of the EU budget is spent on supporting farmers and too little on skills and innovation.
Presenting the plans on Thursday, Agriculture Commissioner Dacian Ciolos said the payments system - the Common Agricultural Policy (CAP) - must become "greener, fairer, more efficient".
He said the EU must make its farm policy easier to understand, because "it is for all EU citizens - as consumers and taxpayers".
The CAP's twin-pillar structure - direct payments and separate grants for rural development - should be maintained, he said.
The CAP is the biggest item in the EU budget, followed by "Cohesion" spending - grants to develop the EU's poorest regions.
Price support to protect EU farmers - called "market measures" - encouraged over-production in the past, leading to butter mountains and wine lakes.
The Commission says market measures accounted for 92% of CAP spending as recently as 1991, but that dropped to just 7% last year.
The Commission's options for the CAP will be discussed by the 27 EU member states before new legislation is presented in mid-2011.
The EU's direct payments to farmers are based on historical reference periods - a system the Commission wants to reform.
Mr Ciolos said the EU could no longer tolerate a system with one set of rules for the older member states - the EU-15 - and another set for the newer ones, the EU-12. Most of the latter are former communist countries in Central and Eastern Europe.
The blueprint also calls for support "better targeted towards active farmers".
One of the criticisms of the CAP is that big landowners can receive payments even if their land is worked by tenant farmers or used by other rural businesses.