Gift Tax in The United States - History

History

The gift tax is a back stop to the United States estate tax. Without the gift tax, large estates could be reduced by simply giving the money away prior to death, and thus escape any potential estate tax. Gifts above the annual exemption amount act to reduce the lifetime gift tax exclusion. Congress initially passed the gift tax in 1932 at a much lower rate than the estate tax, a full 25% under the estate tax rate, while also providing a $50,000 exemption, separate from the $50,000 exemption under estate tax. The benefits were clear: a $10,000,000 gift would be taxed only $2,300,000, effectively only 18.7%, well below the estate tax rate.

The intention was to rapidly generate revenue in the Great Depression, effectively encouraging avoidance of the estate tax by doing so, while lawmakers at the same time publicly, and in both House and Senate, proclaimed the exact opposite objective. Moreover, this was directly at the expense of state tax revenues, as well as of future federal tax revenues. The primary beneficiaries were the wealthiest citizens, whom the estate tax was supposedly designed to target, since only they had cash enough to freely make large gifts. This was the express intention.