Tax policy can affect innovation, productivity and sustainability in the food and agriculture sector through numerous pathways. In general, tax policy affects the decisions of firms and households to save or invest in physical and human capital, with implications for the adoption of innovation. In particular, tax policy influences the conduct, structure and behaviour of farms, input suppliers and food companies. For example, tax systems in some countries can incentivise farm investments by reducing taxable income through provisions for depreciation. In other countries, the tax system allows farmers to smooth income variations over time by using tax averaging. Taxes on income, property and land, and capital transfer may affect structural change, while differential tax rates on specific polluting activities, resources, or input use may affect sustainability. At both the sectoral and the economy-wide levels, the tax system can also be used to provide direct incentives for innovation – for example, preferential tax treatment can be applied to investments in private R&D or to young, innovative companies.