Seeking to avoid the recognized adverse effects of income taxation on production and investment, some analysts propose that taxes should instead be levied when individuals expend their income on consumption. As has been emphasized throughout our praxeological investigations, however, consumption is the ultimate purpose of all production; consequently, taxing consumption produces virtually the same effects as taxing production. The concept of consumption, it will be recalled, is not limited to what is sometimes called "personal consumption," but encompasses all the ends for which human beings produce goods and services. In particular, an individual may maximize subjective utility by giving what he or she has produced to some other individual or organization (p. 4.5:33), and a tax levy on such gifts may be regarded as a special kind of consumption tax. The gift tax has negative effects similar to those of any other tax on income. Most notably, it limits the producer's ability to allocate earnings to the highest end on his or her value scale, thereby decreasing the marginal utility of those earnings. Consequently, the imposition of a gift tax tends to deter individuals not only from productive activity, but also from the thrifty practices needed for investment in a growing economy.

Often donations to certain recipients favored by the authorities (such as, perhaps, nonprofit charitable institutions) are legally exempt from gift taxes. But even if a producer bestows her wealth on one of these favored parties in order to escape the gift tax, that use represents a lower ranking on her value scale. In this case, the gift tax creates a disincentive to production and investment even while it fails to raise any revenue.