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Machinery Replacement, Multiple Optima, and the 1986 Tax Reform Act

Published online by Cambridge University Press:  28 April 2015

Gary D. Lynne
Gary D. Lynne*
Affiliation:
Food and Resource Economics Department, University of Florida
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Abstract

The 1986 Tax Reform Act established a first year $10,000 expensing option and, for most farm equipment, a 7-year depreciation schedule. Under a profit maximization criterion, these tax law features can lead to multiple optima dependent upon discount and marginal tax rates. For example, the economically efficient time to reinvest under a 2 percent after-tax discount rate is at 4, 8, and 30 years for the grower in a 33 percent tax bracket. Thus, the profit maximization behavioral rule needs to be supplemented with knowledge about a farmer's objectives in order to select the “correct” optimal reinvestment interval.

Keywords

machinery reinvestmenttaxesfarmer behavior
Type
Notes
Information
Journal of Agricultural and Applied Economics , Volume 20 , Issue 1 , July 1988 , pp. 179 - 187
Copyright
Copyright © Southern Agricultural Economics Association 1988

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