Executive summary

Tax policy affects agricultural competitiveness through its impact on farm income levels and variability, investment in land and technology, labour and other input use, and the adoption of farm practices. For example, tax systems can incentivise farm investments by reducing taxable income through provisions for depreciation. In some countries, the tax system allows farmers to smooth income variations over time by using tax averaging. Taxes on income, property and land, and capital transfer may affect structural change, while differential tax rates on specific polluting activities, resources, or input use may affect sustainability.

This new review of taxation in agriculture in 35 OECD countries and emerging economies outlines the diversity of tax provisions affecting agriculture, provides an overview of cross-country differences in tax policy, and confirms the widespread use of tax concessions specifically for agriculture, although their importance and modalities differ across tax areas and countries. Common concessions include exempting small farmers from paying taxes, allowing cash-based accounting, providing estimates of taxable income thereby eliminating the need to keep accounts, reducing annual land and property taxes, reducing the taxes associated with the transfer of land between generations, exempting farmers from being registered for value added taxes and providing tax concessions for fuel used in agricultural production.

These concessions were often established long ago and have not since been revisited. Some countries have, however, increased agricultural tax concessions, often in response to the deterioration of the economic situation of farm households, while others have simplified the taxation systems to limit concessions to agricultural land and basic food products. Additionally, some countries have made changes to tax system provisions in order to help smooth income variability. Finally, the use of taxation to improve environmental performance has become more widespread, as has the reliance on tax rebates to support R&D investment.

The review of the literature suggests that tax policy is often used as a lever through which to affect behaviour in the agricultural sector, impacting producer income, farmland transfer, investment, innovation, and sustainability outcomes. In some cases, the tax system is used to complement other policies in achieving larger goals. In other cases, taxes or tax concessions in one area provide incentives that are contrary to the achievement of policy goals in other areas.

There is evidence that in many countries, tax provisions supported farm income, facilitated innovation and investment, thus allowing farm expansion. The economic position improved for farm households compared to non-farm households when after-tax income was considered. At the same time, income taxation generally reduces the frequency of low incomes among farm households. Another general finding is that tax instruments have limited capacity to improve sectoral productivity and sustainability when inefficient farms are largely exempted from taxation. There is growing evidence that environmental taxation can be an effective tool to curb pollution, but careful design and communication on objectives are needed.

Although many countries include provisions in their tax codes designed to influence the agricultural sector, for most of the topic areas explored in this review, there remains only scant sector-specific analysis that can inform future policymaking efforts. The exception to this has been in the area of sustainability, where new tax policies have been implemented alongside monitoring programmes, and periodic analyses of ex post effectiveness have been published and often lead to policy changes to improve effectiveness or repeal inefficient taxes. But the impact of other kinds of taxes on natural resource use is not documented.

Further investigation is needed in nearly all areas covered here in order to make more definitive determinations on whether or not tax provisions have achieved their aims (and if so, under what conditions), how they have contributed to improving farm productivity and sustainability, what secondary effects these tax policies have had on production and investment decisions in the sector, and how they affect competition, within and across countries.