Killing the Death Tax
An Investigation of the Effect of the Estate Tax on the Economy From a Noted Tax Reformer — an interview with Lewis K. Uhler of National Tax Limitation Committee
Bryan Fairman | UC Davis School of Law
Libby Willrich | UC Davis School of Law
Posted Monday, May 1, 2006
6 U.C. Davis Bus. L.J. 25 (2006)

Mr. Lew Uhler is founder and President of the National Tax Limitation Committee (NTLC), one of the Nation's leading grass roots taxpayer lobbies. With offices in the Sacramento Area (Roseville) and Washington, DC, NTLC works with the White House, Members of Congress, legislators in states across the Nation and grassroots organizations to limit state and federal spending through legal restrictions and constitutional change. Mr. Uhler has been at the forefront of the national movements for a Tax Limitation/Balanced Budget Amendment to the United States Constitution and for term limits.

In 1968, then-Governor Ronald Reagan selected Mr. Uhler to serve on the California Law Revision Commission. In 1970, Governor Reagan designated Mr. Uhler as the Governor's State Director of the Office of Economic Opportunity. Subsequently, Mr. Uhler served in Reagan's cabinet as Assistant Secretary of the Health & Welfare Agency. In 1972, Governor Reagan asked Mr. Uhler to organize and serve as Chairman of the Governor's Tax Reduction Task Force. With the assistance of a nationwide panel of advisors (including Nobel Laureates Milton Friedman and James Buchanan), the task force developed California's landmark Revenue Control and Limitation Act, which became a model for tax-expenditure limitation measures in many states.

In 1990, Mr. Uhler was co-author of Proposition 140, California's pioneering state term limit initiative. Under Mr. Uhler's leadership, NTLC has forged coalitions, including "Americans for Responsible Privatization," the "Council for Retirement Security" and more recently the "Tax Cut Working Group" in Washington, which Mr. Uhler chairs with Jim Martin (60 Plus Association) and Dan Mitchell (Heritage Foundation). In 1996, Mr. Uhler participated in a symposium at the Vatican on "The Family and the Economy in the Future of Society" to explore private alternatives to welfare states worldwide.

Mr. Uhler has written numerous articles and opinion pieces on taxes and spending. He is the author of the book, Setting Limits: Constitutional Control of Government, with foreword by Milton Friedman. Mr. Uhler speaks internationally on fiscal issues and has appeared on numerous national, regional and local television and radio programs and has been widely quoted in the print media.

Mr. Uhler is a native Californian, a graduate of Yale University and the Boalt Hall School of Law at the University of California at Berkeley. He is a member of the California Bar and serves Of Counsel with the Newport Beach law firm of Davis, Punelli & Keathley. He and his wife, Cynthia, have four grown sons and reside in the Sacramento area.

Q: Why do you believe this is such an important tax issue?

A: The death tax issue is not a tax issue. It has gotten caught up into the tax cut milieu for the first time. We had separated it out because it is a stand-alone and philosophical issue. It is the last final vestige of statism versus individualism-the recognition of the right of those who create property and create wealth to direct it in the future. In the earliest periods of civilization, in many parts of the world all property (real and personal property) was attributed to the wealth of the sovereign. Later, the concept of imbuing property with your labor and therefore making it private property began to emerge. One of the most interesting elements of this is that in the emergence of the concept of private property, one of the actions that began to imbue a piece of real estate or other tangible personal property with privacy, ownership and alienation was the act of inheritance. This issue of the death tax goes back to the very fundament of the creation and the concept of private ownership and dominion. It has divided the philosophical world for years. The precursors to the socialists all believed that everything was owned by the state. Marx, in 1848, included the elimination of inheritance rights in his Communist Manifesto.

The battle in Washington that we are confronting now is the most fundamental, philosophical confrontation on the political scene to date. It has nothing to do with money. We are fighting the joint committee on taxation and their static revenue analysis of the effects of eliminating the death tax.

Q: What has the NTLC done to repeal the death tax, and why is this an issue that you have chosen to address?

A: We have designed the repeal of the death tax. The measure to repeal the death tax, HR 8, passed the House and is before the Senate now. It provides for a modest exception level, but after that, the assets do not have a stepped-up basis. So, the decedent passes to their heirs the assets at his tax basis. Now, if it is a family farm or business, and they continue to work and utilize it, they have no taxable incident. That is one of the main objectives in this proposal. To allow family farms and businesses to be passed on and not have them interdicted with huge tax problems. Subsequently, as the data reveals, assets are sold. Our calculations and the CONSAD analysis which the American Family Business Institute elaborates on all reveal that if you calculate any reasonable turnover of assets at the capital gains rate, the revenue produced equals or exceeds the very modest revenue the death tax generates. Right now, it produces less than 1% of federal revenues. Furthermore, the benefits of the tax have been shown to be a wash or at most adding modest additional revenue. Certainly, when you build in the economic growth effect of eliminating the death tax, you build a broader economic base. As a result, under the current rate tax structure, you generate more revenue over time than you would from the death tax.

Q: Many opponents of repealing the death tax say that only the richest 2% of Americans pay the estate tax, and it is set to decline as the exemption amount is increased. Why is a tax that only affects 2% of the population such a major issue?

A: The wealthiest people spend a lot of money to hire the best accountants and lawyers to set up trusts and all kinds of stuff that are largely unaffected. It is the smaller person, the marginal guy, who has a few million bucks in a business that is adversely affected.

Q: Who are you finding to be some of your main opponents in this struggle?

A: We are confronted in this fight by certain industry representatives. In the insurance industry, we calculate that of the current total paid for insurance premiums in this country on an annual basis, about twelve billion dollars per year is paid by people to provide resources upon their death, in order to prevent their heirs from having to sell the family business or farm, etc. These efforts are made to fund death. Therefore, it is a dead weight loss on the economy. The insurance industry is a big fan of keeping the death tax. We have to confront them head on. Other forces are the estate lawyers and accountants who deal in this estate-planning area. The state association of appraisers probably has a huge lobbying group to fight the repeal of the death tax as well. There are a lot of people that make their living in being experts in tax court in this area. The concern here is fueled by raw self-interest and nothing else. They have built substantial human capital in this field, so they are fighting tooth and nail to stop the elimination of their gravy train.

Q: What have you found to be the public's sentiment towards the death tax?

A: Polls reveal that people think it is unfair and immoral. You get taxed on your income, the things you buy, your dividends and capital gains when you are successful in investing. Then, to add insult to injury, the heirs are visited by the tax collector during their bereavement. Calculations by the joint economic committee demonstrate that if we never had the federal income tax, which started in the early part of the last century, the size of the economic pie of America would be 3% to 4% larger than it is.

Q: From my understanding, Congress is planning to raise the exception until the year 2010, when it will be completely eliminated. Is this what you are pushing for?

A: You are absolutely right. The way it is set up, the exception keeps going up, and the tax rate modestly goes down until it goes to zero in 2010. Then, it springs fully back to life in 2011. Additionally, our coalition would like to not only make the repeal permanent but also retroactive. All of this requires a lot of maneuvering but that is one of our objectives. First, it has to be permanent elimination - no deals. Then, to the extent we can, we want it to be retroactive.

Q: As you stated earlier, the Senate has held off voting on HR 8. What is your strategy while you wait for the future vote?

A: Our strategy is to wait a little while, to allow the spending increases that Katrina has prompted and the spending recoil that is occurring from this disaster to settle down. I believe the farther we are away from Katrina and its economic effects and the closer we are to the election in November 2006, the better position we are in because this issue is a political lightning rod. We were successful in our accomplishments this last go around, helping change the equation in the Senate by four. Specifically, we used this issue in South Dakota in a major way, spending a lot of money in South Dakota in order to bring the citizens' attention to the fact that the current Senator opposed repeal and his opponent supported the repeal of the death tax. The Democratic leadership understands the nature of this issue, and they have tried to diffuse it. They have convinced our principal sponsor in the Senate on this issue that he would never get the 60 votes needed to break the filibuster, and therefore, he ought to settle for a deal. They were working on deals such as bringing down the tax rate and raising the exemption rate. In response, we have tried to put an end to this sort of deal making. I don't want an escape route. Politics is war by other means. You choose your killing grounds, seal off your avenues of escape, prepare the battle with your artillery fire, hopefully direct it effectively and have foreign observers let you know how you are doing.

We had two false starts this last year. We were promised a vote before the August recess and somehow that evaporated. A lot of money dissipated during that time in the target states. We were told then that they would come back after the August recess in the Senate, and we would have a vote on the sixth of September. After a battery of calls and television promotions, ten days prior to the sixth, along comes Katrina and blows all of these concerns out of the water. We wasted a lot of resources but increased the visibility of the issue. There are 55 Republicans, and we think we have at least 51 of them. That means we need to get nine Democrats to break the filibuster. The House of Representatives overwhelmingly passed HR 8, which is a permanent repeal. We are trying to make sure that key members of the House Ways and Means Committee send a signal to their counterparts in the Senate that they will not accept anything short of a permanent repeal.

Q: How do you respond to those that say the estate tax is a vital incentive for charitable giving contributions to non- profits and charities as well as for the creation of charitable foundations?

A: I believe that the Joint Economic Committee has done a study that says this is really not an issue in the amount individuals are likely to donate to charities. Furthermore, it only makes sense when you think that eliminating the death tax leaves more money in the private sector. In terms of these assets, all the charities have to do is intensify their asking of voluntary contributions. Some argue that if, as a result of the death tax being at 50% (plus or minus), you get X amount of charitable contributions from estates, then this level of taxation must be a good thing. I don't agree with this. Under this reasoning, why not have a 100% estate tax under the justification that it would increase the amount of charitable contributions even more?

Q: What about the argument that repealing the death tax would further widen the gap between the rich and working-class Americans?

A: I don't know if there is any empirical evidence of that. It is as likely as not that most fortunes are dissipated by subsequent generations. If you look around the country today in terms of accumulated wealth, most of it is recently accumulated. I approach it on the following basis. The heirs have no claim on the inheritance until the owner of the resources makes a decision on how to handle his or her property. It is their choice to give it to their kids, give it to charities, or give it to their friends. It is the inherent right of the owner of that property to make those decisions.

Q: Do you see any move to impose another tax to replace the repeal of the death tax?

A: No, and if our calculations are correct and the capital gains tax at its current rate is made permanent, we will still generate revenue equal to or in excess of the revenue created with the death tax. Right now, when someone passes away, after the tax is paid, the assets are stepped up according to their tax basis according to their current fair-market value. The heir inherits current fair-market value as their tax basis of future sale.

Our argument is if you eliminate that, the tradeoff becomes that you don't take any tax at the occurrence of death but you pass through the tax basis of the decedent. As a result, when someone pays a dollar for a share of stock that is now worth one hundred dollars, under current law, the estate is taxed. One of the most difficult challenges that causes so many problems in real world application of this tax is valuation. The instant that someone dies who owned a ranch, someone has to determine the value of that ranch. You fight and spend enormous amounts of money between appraisers in court battles all of which is obviated by this process because the ranch goes to the kids. Now, if the kids decide they want to sell it, the sales price becomes the base. There are no valuation problems because the fair market value is the basis.

In conclusion, this tax is flat unfair, and if a tax system is to achieve its objectives (raise the necessary revenue), it should be as efficient as possible with the least dislocation. It should be fair, balanced and not anti-growth and anti-development. This tax just fails on all accounts of fairness, equity, collection, and all other, relevant impact issues.