The potential impact of differential taxation and social protection measures on farm afforestation decisions

Abstract

The question of what motivates decisions to change land use or farm management practices has recently received much attention in the context of designing policies to incentivise change. This paper critically analyses aspects of the prevailing incentive policies for farm afforestation, with a view to identifying how different components of income influence the uptake of afforestation. Previous analyses have focused on the role of market income and subsidies in farm income. This paper additionally examines the impact of fiscal instruments on disposable income. The analysis finds that from a household welfare perspective, the inclusion of benefits and taxation in calculating relative life-cycle incomes from forestry and agriculture, provides additional information relevant to the farm afforestation decision. From the policy makers perspective, this analysis illustrates the re-distributive nature of the Irish tax/benefits system as benefits can be very significant at the bottom of the income distribution whereas taxation narrows the gap at the top of the distribution. The analysis shows that even if the level of disposable income is higher for agriculture on more intensive farms, the use of a disposable income measure in analysing the returns from farm afforestation, provides valuable insights in relation to how financial policy levers impact on different farm systems with different levels of farming intensity At the lower end of the distribution, the analysis shows that low-income farms could acually be worse-off as a result of planting. Further research is required to estimate “cut” points at which changes in taxation or benefit thresholds and increased level of uptake of benefits, could bring about a gain from the inclusion of forestry in overall farm income.