Reassigning and Assessing the Role of the Gift Tax
29 Pages Posted: 13 Mar 2003 Last revised: 2 Aug 2014
In the Economic Growth and Tax Relief Reconciliation Act of 2001, Congress repealed the estate tax, effective in 2010. In the very same legislation, however, Congress retained the gift tax. This was done based upon commentators' dire warnings that, in the absence of a viable gift tax, taxpayers would minimize their income tax burdens by shifting income either to related taxpayers whose income is taxed at lower rates or to foreign individuals whose income is not subject to U.S. income taxation. To these commentators, the integrity of the income tax system and, in particular, its progressive rate structure, were at stake.
The retention of the gift tax suggests that its primary role will change from a defender of the estate tax to a defender of the income tax. As this transformation unfolds, Congress will likely have to refine the scope and application of the gift tax to better enable it to meet its new role. Alternatively, Congress may choose to modify the income tax to make it less vulnerable to income shifting.
This analysis first explores the traditional role of the gift tax and evaluates the merits of commentators' contentions that the lack of a gift tax would foster an environment conducive to income shifting. The analysis then questions whether the gift tax will truly succeed in protecting the integrity of the income tax. Finally, in lieu of retaining the gift tax, this analysis recommends that Congress instead reform the income tax to strip it of income-shifting opportunities.
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