How Should Gifts Be Treated Under the Federal Income Tax?

Abstract

No consensus exists regarding the proper income tax treatment of gifts. Some commentators believe the tax should fall on the donor only; others believe it should fall on the donee only; and still others believe it should fall on both the donor and the donee.

Although much of the disagreement appears to center on the proper definition of “income,” this essay argues that the problem lies elsewhere. There is no readily identifiable, correct definition of “income,” which means that most arguments tying the income tax treatment of gifts to the income concept tend to be definitional and, for that reason, circular. In fact, what motivates most theories about the proper income tax regime for gifts is a prior view about the nature and purpose of government coupled with a theory of how the tax system best promotes that view. Commentators debating the rules for the income taxation of gifts rarely argue explicitly about their prior views, however, and it is not clear whether, if they did, they would be able to resolve their differences. Accordingly, the debate over the proper income taxation of gifts is in some measure a pseudo-debate.

Problems with efforts to derive normative propositions about taxation from the definition of the tax base are not unique to the gift case; they extend to other debates as well. The analysis therefore has relevance to normative tax scholarship more generally.

Keywords: taxation, tax policy, federal income taxation

JEL Classification: H20, H24, K34