David Hasen’s new work revisits the question of how gifts should be treated under the income tax. His essential point: It depends.
Consider the simple case of donor A making a gift to donee B. There are three plausible treatments under the income tax: (1) single donor tax (no deduction to A and B excludes), which is the treatment under current law, (2) single donee tax (A deducts and B includes), and (3) double tax (no deduction to A and B includes).
How is one to choose? Hasen argues that there is no clear answer, because there is no clear normative definition of income that would suggest one answer or another. Rather, the income definition, and its implication for the proper taxation of gifts, will depend upon one’s normative views on the purpose and shape of the tax system.
Hasen proceeds to describe three basic views of taxation, and the different implications of these views for the taxation of gifts under the income tax. Hasen first suggests that a welfarist view, which generally seeks to maximize a weighted measure of total social utility, could lead to different results. This view could imply double taxation (if behavioral effects of the tax are not taken into account) since the gift reflects additional utility of both the donor and the donee. If, however, the added tax would discourage the gift, then a welfarist might favor a single tax—or even a gift subsidy—to encourage this utility-duplicating activity.
The work then considers the “classical income” or “real asset” view, which is best represented by the Haig-Simons income definition as consumptions plus accretions to wealth during the taxing period. Hasen argues that this view could be understood (though not necessarily) to reflect a libertarian perspective, which would justify taxation as voluntary payments for public goods or benefits. Hasen then argues that the classical income view most likely suggests taxing gifts once to the donor or the donee, but only implies double taxation through a less plausible stretch of this income definition.
Finally, the work considers “fairness views,” which would generally tax individuals in order to achieve a fair distribution of resources or opportunity. Hasen argues that this view could similarly imply double taxation or single taxation to either the donor or the donee, depending on the chosen basis for redistribution. The work concludes by applying this framework to notable arguments in the literature advocating particular approaches to gift taxation.
AThe work is not meant to provide conclusive answers, but rather to demonstrate the fundamental challenges to coming up with a “right” way of taxing gifts under the income tax. More broadly, the work demonstrates the general challenges with defining a normative income tax base. (For another recent work on this bigger issue, see John Brooks (Georgetown), “The Definitions of Income.”)
Of course, the distinction between double and single taxation is ultimately semantic, and one can devise any aggregate amount of tax on a gift transfer, through levies on the donor, the donee, or both. (For the same reason, the corporate “double tax” is misleading to the extent both layers of tax are at lower rates than a single individual-level tax on the same earnings).
Furthermore, gifts can also be addressed through the estate and gift tax. This alternative raises the question of whether it is useful to think about gifts by reference to the income tax alone. The estate and gift tax is not usually understood as an essential complement to the income tax system. In his history of the income tax, however, historian Steven Weisman suggests that Congress excluded gifts and inheritances from the income tax base precisely because it was assumed they would be addressed separately through the estate tax (and later through the gift tax as a backstop).
The estate tax has been rolled back in recent decades through a combination of a high exemption and avoidance opportunities. The new tax bill that passed this week (the infamous “Act with No Name”—following the tortuous path of Odysseus who lost his own name when he lost sight of home) undermined the estate tax further by doubling the exemption. This vitiation of the estate tax may in turn warrant reassessment of the historic single tax on gifts through the income tax, and reconsideration of the donee exclusion under section 102. Alternatively, this development might open the door to an accessions tax on heirs, as has been proposed by Lily Batchelder (NYU).
The tax system will someday have its own “homecoming” and will return again to core principles such as fairness and efficiency. Future bills might even have a name. In this time of turmoil—and opportunity—for the tax system, Hasen’s work will prove valuable and demonstrates the possibilities of fundamentally rethinking longstanding elements of the income tax.