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Every year, rich people use art
to avoid billions of dollars in taxes in the United States.
How?
Well, if you're a billionaire looking
to minimize your tax burden, prepare for some life hacks.
And if you're anyone else, prepare
to be astonished and possibly nauseated
by what happens when tax deductions are combined
with the government's failure to regulate a market.
We all know art is a commercial product, just
like toothbrushes, cars, or "Art Assignment" t-shirts.
And most art purchases are straightforward.
In the US, you buy an artwork.
And you pay whatever it costs, plus the state sales tax.
If you're buying out-of-state, then sales tax isn't charged.
But in most cases, you're supposed
to pay use tax to whichever state you receive it in.
In 2017, there were $63.7 billion in total art sales
globally.
And that's not because the 7 billion of us here on Earth
each bought $9.00 artworks, although that is a nice
thought.
Most of this money is spent by extremely high net worth
individuals, who buy art from the primary market,
such as galleries, where it works
are sold for the first time.
And also the secondary market, like auction houses,
that resell works at increasingly unbelievable
prices.
Seriously, last year at this admittedly astounding Leonardo
da Vinci painting sold at auction for $450.3 million.
And this painting by Peter Doig, who
is well-regarded in art circles, but many people
have never heard of, sold for $28.8 million.
OK, so let's imagine two scenarios.
Scenario one.
You are a wealthy collector from New York
who actually likes art.
You buy a painting from the primary market for $1 million.
You take the sales tax hit of about $88,000,
and hang it in your home.
You enjoy it greatly for many years,
while the value of the painting steadily creeps upward, thanks
partly to your good luck and/or good eye for art.
And also partly due to the support of the artist's
gallery, which works hard to get the artist's work shown
in museums, and also increases prices
through sales and strategic auctions.
All the while, the art museum you support
has been courting you.
And has let you know that they would
be happy to take this work off your hands,
should you wish your painting to join their collection
and reach a wider audience.
This sounds pretty good.
And since you've owned the painting for more than a year,
you can donate the painting to the museum
and claim a charitable income tax
deduction equal to the work's current fair market value.
You hire a qualified independent appraiser
who researches sales records and provides you
with certified documents that say your painting is now
worth $5 million.
Cool.
You get advice from your accountants,
because you have more than one.
And they tell you that if you give the painting to a museum,
you can deduct its appraised value from your taxable income,
as long as the deduction is less than 30% of your income.
So if you make $17 million a year
and you donate the painting, your taxable income
goes down to $12 million a year.
But say you make, for instance, a paltry $3.3 million a year.
You can only deduct 30% of that.
But fear not.
You can spread the tax deduction over five years.
So you let the museum know you'd like to give it to them.
And they say, "Thanks!"
And put your name on the wall label
next to the painting when they display it, which is nice.
At the end of it all, you've saved
at least around $1.75 million in taxes, a pretty good return
on your $1 million investment.
And the museum is able to share a new artwork
with the community, which is nice,
since art prices are so high museums can't afford
to buy it directly anymore.
Scenario two is that you're a wealthy person
from New York who doesn't actually like art that much.
But you've realized it's investment potential.
You buy a $1 million painting.
And you don't care about having it in your home.
So you ship it directly to a free port,
which are giant climate-controlled warehouses
in tax-free zones.
As long as it's there, you don't have to pay tax on it.
The art stays safe in the dark, huddled next
to all the other lonely caged luxury goods.
And you keep earning money, while the value of the artwork
increases for the same reasons as before.
Plus, maybe you loan it out to museums a few times,
which bolsters its exhibition history
and makes it more theoretically valuable.
After 10 years, you get it appraised.
And you learn of its $5 million valuation.
"All right," you say.
"Let's try to sell this."
You talk to the dealer who sold it to you.
And maybe they can convince another client
to take it off your hands directly.
Maybe that client even has art stored at the same free port.
And they broker a deal between the two of you,
where the art changes theoretical hands,
but never actually moves out of the free port.
Nobody pays sales tax.
You've made a sweet profit.
And the money you made is taxed as capital gains,
which means your tax rate is lower
than it would be on income.
Or you decide to take the painting
to auction, at which point you have
to take the sales tax hit you avoided before,
and also pay fees to the auction house.
It goes up for sale.
And because an appraised value isn't its actual value,
it could not sell at all.
Or it could sell for anywhere between its reserve price--
the minimum price they've agreed with you
they will sell it for--
and who knows how much.
Because auctions aren't regulated,
they're famously subject to manipulation.
Maybe other collectors of that artist's work bid the price up.
Or maybe galleries buy works through proxies to maintain
the value of other works.
We don't really know.
But we do know that these results are reflected
in future appraised values, which
are then used to determine other collectors' deductions.
And again, the profit you make from the auction
is taxed at that lower-than-income capital gains
rate.
Both of these collectors are taking risks.
There is no guarantee the art you buy will increase in value.
And there's also a possibility you won't find a buyer when
you want to sell the work.
But the truth is this.
The number of billionaires in the world is rising.
And an increasing number of them are gaming the art system
to save a fortune in taxes.
As for how I feel about all this?
[VOMITING]
We don't talk about the art market
on this channel very much for a reason.
For me, it's the least interesting part
of the whole art endeavor.
But it's what media outlets love to report on.
And heck, you're still watching.
Art is a commodity.
But it's not merely a commodity.
It has a monetary value that can sometimes,
but not always, be quantified.
But it also has another kind of value that is less measurable.
When a huge number gets attached to an artwork,
you might look at it and think, whoa.
That must be a really important painting.
I better look closely and figure out why.
But most of the time you quickly move on to, whoa.
There's no way this application of pigment
mixed with oil on fabric, stretched over a wooden frame,
can live up to this kind of evaluation.
It can still be a great painting.
But it becomes increasingly difficult for it
to meet the expectations created by the extraordinary number
that's floating around in its ether.
These market conditions are fantastic
for uber-wealthy collectors, for a very small number
of artists anointed as good bets, and only
a handful of mega-major conglomerate galleries.
Emerging and mid-tier galleries--
who might actually be focusing on cultivating young
or under-recognized talent, and thinking outside of market
forces about what makes for good art--
in general don't have access to these collectors.
And very many good artists are not represented by galleries
and can't even approach this level of the art world.
Museums do benefit from being supported by the wealthy
and being given works from their collections.
But museums also find themselves in a terrible bind,
as the deductions that fuel donations have inflated art
prices way beyond their reach.
And they also run the serious risk
of reflecting only the tastes of their donors and trustees,
rather than the purported best of what's actually around.
There is some trickle down effect,
where wealthy collectors fund nonprofit arts initiatives that
have nothing to do with their market interests.
And there is of course lots of great art happening
around the world that is completely
unrelated to free ports and auction houses.
But this is a reality we must grapple with.
As arts role as financial capital
has become more and more influential,
it's bleeding out to affect its life
as social and cultural capital.
It's affecting what kind of art gets made, shown,
and canonized in museums.
I mean, it's been reported that there
are 1.2 million artworks currently
in a dark locked free port in Geneva, Switzerland.
It's hard to see who benefits from this,
except for the richest people in the world.
And the downside of this system is becoming,
and will continue to become, increasingly apparent.
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