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Machinery Replacement, Multiple Optima, And The 1986 Tax Reform Act

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  • Lynne, Gary D.

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.

Suggested Citation

  • Lynne, Gary D., 1988. "Machinery Replacement, Multiple Optima, And The 1986 Tax Reform Act," Southern Journal of Agricultural Economics, Southern Agricultural Economics Association, vol. 20(01), pages 1-9, July.
    • Handle: RePEc:ags:sojoae:29706
    DOI: 10.22004/ag.econ.29706
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    References listed on IDEAS

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    1. R. K. Perrin, 1972. "Asset Replacement Principles," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 54(1), pages 60-67.
    2. Donald W. Reid & Garnett L. Bradford, 1983. "On Optimal Replacement of Farm Tractors," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 65(2), pages 326-331.
    3. Ronald D. Kay & Edward Rister, 1976. "Effects of Tax Depreciation Policy and Investment Incentives on Optimal Equipment Replacement Decisions: Comment," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 58(2), pages 355-358.
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    Cited by:

    1. Smith, Vincent H., 1990. "The Effects Of Changes In The Tax Structure On Agricultural Asset Replacement," Southern Journal of Agricultural Economics, Southern Agricultural Economics Association, vol. 22(01), pages 1-9, July.
    2. Helmers, Glenn A. & Watts, Myles J. & Smith, Vincent H. & Atwood, Joseph, 1990. "The Impact Of Income Taxes On Resource Allocation And Structure Of Agriculture," 1990 Conference, January 6-9, Albuquerque, New Mexico 260181, Regional Research Committe NC-181: Determinants of Farm Size and Structure.
    3. Unknown, 1998. "Commodity Costs and Returns Estimation Handbook (entire book-condensed file)," Commodity Costs and Returns Estimation Handbook,, Iowa State University.
    4. Batterham, Robert L. & Fraser, K.I., 1995. "Capital Equipment Replacement Decisions," Review of Marketing and Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 63(01), pages 1-8, April.
    5. Unknown, 1998. "References/Literature Cited," Commodity Costs and Returns Estimation Handbook,, Iowa State University.

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