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THE IMPACT OF SELECTED TAX PROVISIONS ON FARM GROWTH AND STRUCTURE
Abstract
The objective of this study was to evaluate the effect of selected tax provisions on farm growth and the structure of production agriculture. It was postulated that farm growth rates are the major factor in determining structural changes in production agriculture. The hypothesis of this research was that tax policies have a direct impact on farm growth and that this impact varies with farm size. A mixed integer polyperiod linear programming model was constructed to trace out the growth patterns of two cash grain farms differing in size. The starting size of each model farm was 240 and 1,920 acres. The objective function was the maximization of after-tax wealth over a 20 year planning horizon assuming all assets were liquidated at the end of this period. Two scenarios were analyzed, one assuming progressive and the second constant (25%) income tax rates. Two alternative policies were tested for each scenario: (a) A non-restrictive policy; and (b) A restrictive policy. The non-restrictive tax policy included: (1) Accelerated depreciation; (2) Investment credit; (3) Interest payment write-offs on land mortgages; and (4) Capital gains preferential treatment. The restrictive tax policy consisted of: (1) Straight-line depreciation; (2) Excluded investment credit; (3) Interest payment on land mortgages were not tax deductible; and (4) Capital gains were treated as ordinary income. This research indicates that tax provisions differentially affect farms varying in size, confirming the hypothesis of the study. Under progressive income tax rates and the non-restrictive option the large farm showed greater growth in owned acreage, but lower growth in net worth than the small farm. By contrast, a combination of progressive income tax rates with the restrictive alternative showed that the small farm grew faster than the larger farm in both net worth and acreage. The results reveal that a shift from progressive to constant tax rates led to greater net worth and acreage growth for the large farm compared to the small farm under both tax alternatives. A major conclusion of this research is that a taxation system including progressive income tax rates and a restrictive tax alternative (as defined above) may tend to promote a cash-grain production sector composed of numerous 'small' farm units. A combination of progressive tax rates with a restrictive tax policy would tend to favor larger and fewer farms. If a constant income tax rate is implemented, the results indicate that under both tax policy alternatives included in this study, a rural economy based on larger and fewer farms would be promoted.
Subject Area
Agricultural economics
Recommended Citation
BRAVO-URETA, BORIS E, "THE IMPACT OF SELECTED TAX PROVISIONS ON FARM GROWTH AND STRUCTURE" (1981). ETD collection for University of Nebraska-Lincoln. AAI8110569.
https://digitalcommons.unl.edu/dissertations/AAI8110569