This article presents an overview of the application of taxation as a policy instrument in forestry. Forests cover about 30% of the total land area and constitute one of the most important natural resources on the planet. Forests worldwide produce a great amount of timber and various non-wood products, and they provide a wide range of ecological services. Following a brief review of the major forms of inefficiency of forest management in free markets, we discuss the behavioral effects of the general types of taxes targeted at forest assets and forestry income. This is followed by a review of the forest taxation systems in four selected countries (China, Finland, Sweden, and the United States). It is concluded that forest taxation has been used mainly for the purpose of collecting public revenues. Two common forms of inefficiency with respect to forest management are overharvesting (especially in developing countries) of existing forests and underinvestment in reforestation. Forest taxes and subsidies that are effective in correcting one type of inefficiency usually intensify the type of inefficiency. The effectiveness of taxes as a policy instrument to promote sustainable management of forest resources, remain to be evaluated.