This chapter highlights the effects of tax policy on farm firm decision-making, aggregate investment behavior, and supply and prices of agricultural commodities. It reviews the institutional setting of the current tax law in the United States and discusses the concept of tax sheltering. The chapter aims to identify some of the basic policy issues and also discusses the relevant research in agricultural taxation. The differential taxation of ordinary income compared to capital gains along with the opportunities for tax sheltering in agriculture influence the types of assets purchased and thus the characteristics of the financing needed. Tax policy affects the efficiency of agriculture through incentives or disincentives that the tax laws provide to: acquire more productive technology, substitute between capital and labor, develop new technology, and exploit economies of size. Individuals with income from farming pay a small proportion of total federal income taxes.