Consideration of Investment Tax Credit in a Multiperiod Mathematical Programming Model of Farm Growth

Marginal federal income tax rates on farm firms have been increasing due to higher taxable incomes from increasing farm size, increasing off-farm income of farm families, and inflation. Krause and Shapiro and Barry (p. 29) have noted that agricultural economics research on the impact of these increased taxes is limited. The investment tax credit is a provision of federal income tax law that has received especially limited research attention. Kay and Rister analyzed the impact of this provision on beef cattle replacement, and Chisholm considered its impact on farm machinery decisions. However, the investment tax credit has not been considered in mathematical programming models of farm firm growth in the same manner as other income tax provisions (Vandeputte and Baker, Barry and Willmann). The purpose of this paper is to present a method of incorporating investment tax credit provisions in a multiperiod mathematical programming model. Specific objectives include: review of the theory of capital budgeting in reference to the investment tax credit, consideration of a tax submatrix for a programming model which includes investment tax credit, and presentation of an empirical example.