This article examines the neutrality of income taxation in the so-called Austrian sector of the economy. By focusing on the forestry sector, it is shown that certain exemption practices of yield taxation can be modified to restore the efficiency of the taxation. Earlier research on the production efficiency relating to different capital income tax systems in the Austrian sector shows that yield taxes based on realized income lead to inefficient allocation of resources between the Austrian and the ordinary sector of the economy when pretax distortions are present. The models used in the earlier tax literature do not, however, differentiate between taxing capital income and taxing the initial capital under an individual occupancy of an asset. In this article, by explicitly separating timber capital taxation from timber capital income taxation, a modified yield taxation scheme is presented, which gradually corrects an initially distorted allocation of resources between forests and other assets in the economy. For. Sci. 46(2):219-228.