Does the Tax Law Discriminate Against the Majority of American Children: The Downside of Our Progressive Rate Structure and Unbalanced Education Incentives

Abstract

This article is directed at the lack of consistency in the treatment of parents and grandparents who give some of their income to minor and adult children. There is a distinct favoritism accorded to parents and grandparents (and others) who are able to shift income from their publicly-traded securities to children through custodial accounts and other mechanisms. Those who derive their income from private businesses and services are treated much less favorably and are forced to resort to more costly and more complex methods to shift income to children.

After exploring the historical origins of the prohibitions on so-called "income-splitting", and some of the statutory exceptions, the article then demonstrates how the graduated rate structure and other features of the income, gift and estate tax laws are directly responsible for freezing out the majority of children in this country from various education tax incentives provided, in effect, to only a targeted group.

Finally, the article analyzes various alternatives to resolve this discrimination, which are aimed at broadening the education opportunities (particularly higher education) for a large number of children. I then argue that some of these alternatives may be far less costly to the government by replacing the present patchquilt of complex and incoherent tax incentives.