THE EFFECTS OF TAX POLICY ON INVESTMENT IN AGRICULTURE

The effects of tax policy on agricultural investment are investigated by estimating a dynamic interrelated input demand system. Net investment is specified to give rise to increasing internal costs of adjustment, resulting in capital inputs being quasi-fixed. The system of demand equations is derived by incorporating a quadratic normalized restricted cost function into a long-run dynamic optimization framework. The system of input demand equations for U.S. agriculture is estimated with aggregate annual time series data for 1955 through 1978. Simulation of the dynamic model indicates that changes in tax policy, including the introduction of investment tax credits, shortened tax lives, and accelerated depreciation, increased the 1978 stocks of equipment and structures by 2.7% and 1.3%, respectively.