This paper examines the effects of taxes and investment incentives on relative capital/labour costs on farms of different sizes. Income tax relief reduces the cost of purchased non‐capital inputs to farmers, while investment incentives reduce the cost of capital items. A framework is developed for calculating the relative magnitudes of these effects and it is shown that capital costs have been reduced relative to labour costs throughout the post‐war period in the U.K. and on large farms (paying a higher tax rate) more than on small fa