Wealthy individuals could reduce their tax liability through owning luxury art, which cannot be tracked. Consumption taxes would be more efficient.
Wealthy individuals could reduce their tax liability through owning luxury art, which cannot be tracked. Consumption taxes would be more efficient.
E arlier this month, the annual Art Basel Miami show, one of the art industry’s largest events, was held. This year an art installation titled “Comedian,” by Maurizio Cattelan, which consisted, in its entirety, of a banana duct-taped to a wall, was surprisingly auctioned for $120,000. Some decried this as an exuberant display of excess, highlighting the current state of wealth inequality.
Such critics, such as Berkeley economists Emmanuel Saez and Gabriel Zucman, have argued that this type of “unnecessary” wealth should be extracted by the state with a wealth tax. However, such art sales in fact make the opposite case, against the wealth tax, given how hard it is to track the ownership of such art once it’s been bought.
Increasing the consumption of luxury art, as well as increasing charitable giving or political donations, would become newly incentivized ways to diminish traceable wealth so that rich people would pay smaller wealth taxes under an annual wealth-tax regime of the sort advocated by Senator Warren, Senator Bernie Sanders and others. According to the 2019 Art Basel and UBS Global Art Market Report, $29.1 billion of art was sold in 2018 alone.
Here’s how it would work: Suppose Senator Elizabeth Warren becomes president and somehow passes her 2 percent wealth tax for those with fortunes greater than $50 million. If a member of the top 0.1 percent, with a fortune of more than $50 million, buys a $1 million artwork at Art Basel Miami, this reduces the buyer’s traceable wealth by $1,000,000. Say the buyer owns it for 10 years and then sells it for the same amount he bought it at (not an unreasonable assumption, given long-term trends in the Sotheby’s Mei Moses World All Art Index). The buyer has avoided $200,000 in wealth taxes (2 percent each year for 10 years) as a result of the purchase. However, he incurred $60,000 in Florida sales tax, which is 6 percent. So as a result, the buyer saves a net $140,000 in taxes. This works with any kind of art or luxury item that can’t be meaningfully tracked and priced by the IRS.
How does it work this way? In practice, a wealth tax can only be assessed realistically on the value of objects that are somewhat frequently valued to avoid massive administrative costs. In other words, the government can compute a wealth tax with ease only and have a current price in order to charge a fixed percentage of it without having to hire armies of appraisers and auditors. Artwork and antiques were exempted in many European wealth-tax regimes on the grounds they were hard to value though Warren’s proposed wealth tax would not provide such exemption.
In the case of art, appraisers are often used to estimate an asset’s current price (though many appraisers will often give different estimates), but it’s not likely that the IRS will employ an army of appraisers who are experts on every area of contemporary art. Even if the government did manage to hire appraisers, many would have vastly different opinions over the value of a particular piece of art that hasn’t been sold for some time.
Furthermore, art purchases are not tracked, and no international art registry exists. Individuals can buy art anonymously; for example, a proxy for Saudi crown prince Mohammed Bin Salman anonymously bought Leonardo da Vinci’s Salvator Mundi in 2017 for $450 million.
For these reasons, it’s unlikely that high-end art collections (or other luxury items, such as jewels or watches) could reasonably be tracked by the IRS, given the millions of such objects that exist, if a wealth tax were ever to become law (constitutional issues aside).
At the same rate, art dealers and other sellers are still required by law to pay sales tax, which is easier to collect at the point of sale as a percentage of the transaction price. For instance, the buyer of the $1,000,000 piece of art still pays $60,000, or 6 percent of the initial price, suggesting that sales taxes are a much more efficient way to raise revenue.
Hence, if anything, the Art Basel banana makes the case for a consumption tax, which can be made progressive, like those advocated by AEI economist Alan Viard and others. A progressive consumption tax collected at the point of sale effectively pays a tax rebate to low and middle-income filers whose income is below certain thresholds to counteract the tax’s regressive properties.
Beyond art, different accounting methods, such as mark-to-market accounting versus historical cost accounting, could create substantial differences in wealth taxes assessed, as could several sorts of behavioral distortions such as offshoring and an exodus of capital (such as France’s exodus of 42,000 millionaires between 2000 and 2012 during the reign of its wealth tax).
Even evaluating financial assets requires the government to make some tough accounting decisions. For instance, illiquid assets such as private equity are infrequently marked and require auditing, which would only be a further cost to the IRS if every illiquid private asset in America needed to be privately valued and audited.
As Art Laffer and many others before him have said, “All taxes are bad; some are just worse than others.” Wealth taxes turn out to be among the worst by encouraging capital flight, and for this reason they have been abandoned by nine of the twelve European countries that had them in the 1990s.
Our current tax system could be more efficient by reducing taxes on income, which discourage work, and instead raising revenue from a tax on consumption, which does not discourage work.