The Gift Tax Should Be Killed With the Death Tax

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Posted by Alexander Hendrie on Monday, May 1st, 2017, 3:30 PM PERMALINK

There is a consensus that pro-growth tax reform must include repeal of the death tax.

President Trump’s recently released tax plan repeals the death tax. So does the House Republican “Better Way” Tax Reform plan proposed by House Speaker Paul Ryan (R-Wis.) and Ways and Means Chairman Kevin Brady (R-Texas).

While this consensus is an excellent step in enacting pro-growth changes to the tax code, repeal of the death tax must also mean repeal of the gift tax. With the death tax gone, the gift tax is no longer necessary.

First enacted into law in 1924, the gift tax was intended as a backstop to prevent taxpayers from avoiding the death tax. Today, the gift tax and death tax remain linked – they share an asset threshold of $5.45 million, and both are applied at a 40 percent rate above that threshold.

Both are taxes on savings that a taxpayer has already paid taxes on at least once – through individual income taxes – and possibly other times.

Together, they collect very little revenue and suppress economic growth. In 2015, both taxes collectively brought in $19.2 billion. The federal government brought in a total of $3.25 trillion, so these taxes contributed less than 0.6 percent of all federal revenue. Even then, repealing the death tax and gift tax would produce strong growth that offsets most of this lost revenue. After macroeconomic effects, repeal of both taxes would reduce revenues by just $19 billion over the entire first decade due to more than $200 billion in higher income tax and payroll tax revenues, according to research by the Tax Foundation.

If the gift tax were left in place after repeal of the death tax, it would raise little, if any revenue because a taxpayer would simply wait to transfer their assets until they died. In contrast, repealing the gift tax along with the death tax would serve as a backstop to ensure the death tax is gone for good. If taxpayers believe the death tax will be reinstated, they can simply transfer assets to heirs before it takes effect.

While some argue that the gift tax also exists as a backstop for the income tax, this is not true. There are already rules in place to stop a taxpayer from transferring wealth to an heir. The “kiddie tax” subjects a child’s unearned income over $2,100 to a parent’s higher tax bracket.

This nullifies any tax benefit from transferring wealth to a child that would otherwise be in a lower tax bracket. Although the kiddie tax may cause other problems including complexity for families, its existence means there is no need to retain the gift tax. 

2017 should be the year that the death tax is finally repealed. With it, lawmakers should also be sure to repeal the gift tax. 

Photo Credit: 401kcalculator.org

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