Fine Art Markets as Taxes on the Rich

I previously explored some of the many problems with art markets and art museums in particular. Let us now turn to the question of the art of taxing art.

The counter to the oft made accusation that lotteries are taxes on the poor might be that fine art is a tax on the rich. What better way for the rich the be relieved of their capital? 

Assuming the rich won't be investing it studiously, using their capital to purchase art at highly inflated prices is preferred to them spending it on goods and services with more tangible resource demands, and perhaps it is preferred to them giving it away to charity. If we don't trust them to invest it well, why would we trust them to donate it any better. 

Of course, we have to think this through. Doesn’t somebody end up using the funds to purchase consumption? Likely in many cases, but as long as they are operating in a closed system (I buy your painting, you buy my sculpture), this needn’t be the case. 

And all the better if the art is fake. Turns out a lot of the art in museums is fake (perhaps +5%), and all the players in the art world are on the take to keep this a secret. If the rich are swapping art at inflated prices that isn't actually authentic art, we have them well occupied spending their wealth, potential demands on resources, on a minimal amount of actual resources. Listen to Michael Lewis' The Hand of Leonardo for more on this. 

Yes, it would push resources into pursuing production/creation of fine art (too many painters and sculptors) but is this really so bad at the margin? 

How should we actually tax it? Tax deductibility for donations to museums is problematic. If I give up a non-income producing asset, why should I necessarily avoid an income tax? And if I give it to an entity exempt from income tax, this is doubly problematic. Should we separate fine art from collectibles (wine vs paintings vs classic cars vs musical instruments, etc.) with the ultimate distinction being those that are value-holding assets (similar to precious metals) versus those that are consumption assets? How much of each quality does a piece of art possess and who decides? This gets pretty fraught pretty quickly. Back to Michael Lewis' podcast above, the compromised ref is very much at risk.

Should we exclude art and collectibles transactions under a consumption tax such as a VAT or national sales tax? These activities aren’t significant resource consumptions. All else equal we want to encourage this swapping as opposed to the funds being spent on actual resources.

If you tax something, you get less of it. My principal is to tax the use of resources and not the creation of resources. A consumption tax does this, but items like art pose problems. Unlike pure capital assets (stocks and bonds for example), collectibles have consumption value and use resources. It looks to me at first glance that most VAT systems distinguish between individuals and firms with only the later subject to the VAT. This makes sense and probably preserves my secondary idea of not unnecessarily discouraging the rich from "taxing" themselves through art.

P.S. Also, see this interesting report.

The Trouble with Art Museums

A few years ago I had the pleasure of visiting the Barnes Foundation art museum in Philadelphia. It is extraordinary, and I highly recommend it. The history of this art collection and why it is where it is today is very interesting. And that's where the trouble begins.

Supposedly, the art collection is worth $25 billion! Wow, that's a big number. If your first thought upon hearing that is, "how would we know?", you are thinking like an economist.

If the museum burned to the ground losing all the art inside, would the loss to society actually be $25 billion? How would we know? Without robust and recent market transactions, we wouldn't. Yet that is just the beginning of the problem. 

The reason the art is in its current location is because in the 1990s the foundation was in financial trouble. One solution was to take some of the art on a world tour and then move the collection, the Barnes, to Philly. Maybe I'm just naïve or cynical, but things worth $25 billion aren't that hard to cash flow normally. 

The foundation raised about $150 million dollars to relocate a few miles into Philly from Merion Station, PA building a new facility and presumably using the remainder as an on-going endowment for maintenance. While there are many minor points to reconcile in all the legal and financial battle involving the move, there is a bigger point I'd like to make. Admission to the museum is at most $25. What's more, capacity is very limited--it is a relatively small space with limited hours of operation. At $25 billion in value why isn't there a line out the door and/or a very high-priced secondary market for tickets? Seems like a steal. Well, it is part of the art market; therefore, it probably is . . . just not in the way my questions would indicate. 

The art world is not designed--no system this involved ever is. It is the result of an emergent evolution. The spontaneous order that created it and drives it is not entirely or even largely benign. It is the result of a series of intentional manipulations and unintentional consequences from private, selfish, and in some cases socially-negative ulterior motives. Art museums aren't about public access to refined artistic culture. 

Allow me to begin the disillusionment with an excellent EconTalk, Michael O'Hare on Art Museums. The most forbidden thing an art museum can do is sell any of its collection. Even if it means some art will never be seen, it is somehow better that it stay in cold storage than be sullied by commercial activity. For the short version on why, see this episode of Adam Ruins Everything. For the longer version, see this article from Quartz. 

Value is like water--it seeks its own level. Interferences with this natural process can be expensive and often are resource destructive. One version of this is politically powerful people, who are otherwise unwilling to put their money where their advocacy mouth is, working to stop market transactions. Consider also cases like when the city of Detroit's bankruptcy reorganization had creditors pursuing the collection at the Detroit Institute of Art. 

This is the kind of example where preventing "priceless" collections from being sold or commercialized might mean very hard choices for governments facing enormous pension liabilities. If those assets are off limits, there are two big problems. The first is how the liability problem gets solved once a great option (selling off valuable assets) is removed. The second is how well can that same entity be a good steward for the art. They have already gotten themselves into financial difficulty, and now they are additionally constrained by having to at least store the art. 

I enjoy art museums generally and some in particular. The idea of art museums is something I support in theory, but in practice it has become rather fraught with very undesirable aspects. The pretentiousness is not just a bug. It is a feature of a bigger bug. Art museums are about exclusion despite the conventional marketing otherwise. Perhaps they are simply fancy, tax-favored institutions for hoarders? Malcolm Gladwell's Revisionist History makes the case in two episodes. 

Speaking of taxes, that is yet another troubling aspect of the art market with museums playing a key role. I'll explore that in the next post. 

One-Two Punch, or . . .

. . . How to go down for the count.

Let's make a boxing analogy for "appropriate" humor: Know your sparring partner; know when it is the real match; there are rules (no below the belt, but the belt moves); stay in your weight class. 

I post this in reflection upon the recent blow up of a comedic tweet by Niskanen Center's now former vice president Will Wilkinson. 

As one who has always been very comedic, I both identify with and fear hitting below the belt. I’ve done it, and I have fortunately always been forgiven when it mattered. I also identify with and fear what got Wilkinson into trouble--not knowing when it was a real match. In other words making a joke in the "wrong" way at the "wrong" time. I use the scare quotes because I've never been big on this concept. It is "wrong" because you the audience (intended audience or accidental audience) didn't like it. 

I am ambivalent on the idea that an honest attempt at humor is wrong. I don't want to offend people, but I know it will have to happen from time to time as both a risk of comedy (and serious argument) and because everyone at one time or another is overly sensitive (or hears things the wrong way). In truth I agree with Scott Sumner that there are no offensive jokes. So my views are simultaneously: I am sorry you have taken offense and Too. Fucking. Bad. 

To one degree or another grown-up comedy (not necessarily “adult” but certainly mature in the sense of developed and sophisticated) makes the audience uncomfortable. The other elements of comedy (surprise and irreverence) are at play here too in that comedy has to push boundaries or it is too childish to be considered “grown up”.

Time and place are tricky, though. Elon Musk has been very active on Twitter either joking or promoting (or both) the GameStop, et al. and Dogecoin trades. Is he humorously trolling? Should he be? 

This is a thorny issue. He uses Twitter to promote serious ideas including his public company. People look to him as an authority figure. We know we lose context and tone in email. That shortcoming is often taken too eleven when on Twitter. Maybe what he is doing is going over my head, and I should see rule #3 below. Regardless, he is an adult speaking to adults . . . yes, rule #3 indeed.

A healthy society allows mistakes. Actually it embraces them knowing they are a cost of progress. If a comedian cannot bomb, he cannot ever entertain. 

Here are two rules we as the audience should follow:

1. Assume good intent.
2. Accept sincere apology.
3. When offended, get over it. - if for no other reason, your own happiness

So back to Wilkinson. His comedic attempt was ruled a mistake by Niskanen who didn't accept apology. We don't live in a world where my rules above are followed. Rather we live in what Arnold Kling calls a Zero Tolerance Culture. And as Jason Brennan perfectly points out, this is a cancel culture with glaring hypocrisy. 

Knock knock

Who's there?

Boo

Boo who?

Why you cryin'? It's just a joke.

A rose by any other name...

Partial list of things as they really are (these are not all original to me):

• Universities are hedge funds that run research labs and have football teams. 
• Fast food companies are real estate firms with kitchens. 
• Democracies are insurance companies with armies. 
• Public (government) schools are unions that run day care centers. 
• Police departments are unions that run protection rackets. 
• Banks are time-travel machines for assets that tax uncertainty. 
• Home Ownership is tax-sheltered/favored investment masquerading as industrious virtue. 
• Public libraries are intellectual social status symbols with warehouses. 
• Churches are mutual-aid societies that offer moral guidance and tribal solidarity. 

All Aboard!

Apropos of nothing in particular . . . 

Invest with the perspective that we are just passengers on trains. 

We are not the engineer. 

We are not a little kid laying out a model train set. 

We can choose the trains we board and the ones we avoid. 

Some are faster. Some have better safety. Some have more amenities. 

None are perfect, but some combinations are much better at getting us to our destination, and, importantly, we do not all have the same destinations. 

We cannot dictate the trains' schedules, speed, route, etc. 

We just have to accept what the trains before us are offering and decide among that option set--not an ideal, imagined one. 

We do not have to take the most popular trains if they aren't actually the right fit for us. 

Constraints are individual just like goals. For example, even though we both want to go from Los Angeles to Chicago, the Silver Streak may be best for you but not for me because I have a lot more luggage to transport and that train has limited capacity. 

It can be good to have a travel agent to help plan our trip, and a great conductor can help guide the journey. But it is us who have to decide, board, and endure the journey including if the train breaks down forcing us to find alternative options. 

Good Minds Resist Generalizing

Categorization is a natural and helpful way to navigate the world. Yet taken to an extreme it leads to very poor conclusions. Figuring out when the process is benign and helpful versus when it is harmful and nonsensical is high art--there such a fine line between essential black-and-white thinking and destructive stereotyping. 

That is one of my takeaways from listening to Kevin Dutton on The Michael Shermer Show this morning on my drive to work. I might summarize the argument as a distinction between a wise-thinking skeptic and a poor-reasoning lizard brain. 

The lizard brain wants quick, straightforward answers that cleanly divide the world into two dichotomies. It wants jointly exhaustive (all things of this type are found in this model) and mutually exclusive (all things are each in exactly one or the other of the categories). That is not how the world works of course. 

Wise-thinking skeptics adjust their conclusions and update their priors. They allow more latitude for exceptions when the stakes are higher as well as when the evidence is less clear. Consider this graphically:

The lizard brain operates along the red line increasingly generalizing for ever-more important the subject. The wise skeptic is the inverse resisting generalization increasingly as importance rises as shown in the blue line. Notice how the skeptic is not linear as well. For him magnitude matters.

I promise to try to keep this in mind as I go about thinking. 

The Time of Biden

Now that all the attempts at election stealing are over I feel compelled to put down in writing some predictions about Biden's presidency. Call it political fatigue from the 400 years of the Trump Presidency, but it is hard for me to muster much energy to do this. Still, here goes . . .

Optimism:

There are two kinds of optimism in the case of Biden--relative and absolute. The relative is in regard to the Trump alternative and perhaps the Biden of politics past. The absolute is more genuine if not also more wishful. 

Trade - This one is quite positive even though it is strongly of the relative variety. Biden was never great on trade and many times poor. Still this has changed as he shifts in the political winds. He both wants/needs to be not Trump and the political base is different for Democrats today than it was when he first ran for president over three decades ago. See my Five Tribes theory for background, but Labor is not the Democratic lock that it was in the past. Just a reset to pre-2018 (actual policy) and pre-2016 (rhetoric) would be a great improvement. 

Immigration - There is a strong chance that Biden will be very good on immigration. The development of Democrats getting better on immigration has been building for some time having only accelerated under Trump. So in this case we have relative and absolute improvement opportunities. 

Drug Policy - My optimism is tempered here, but it is present in an absolute sense. At the very least we should get a more hands-off, non-escalating war on drugs policy. This is a BIG improvement from what we would have expected from a 1990s Biden. My baseline expectation is eventual of decriminalization/legalization of marijuana within the next few years.  

Presidential Prestige - I am optimistic that the tone and style of the office will now be back to a civilized place--very much a relative optimism. The office of the U.S. President should be occupied by a person easily described as a gentleman or lady. Trump never fit this description, and his final days were the icing on the top. Yes, I want that same office to be greatly diminished in terms of power and worship. My hope was Trump would deliver the diminishment without going Game of Thrones. Largely my fear of getting the reverse was realized. 

Pessimism:

Unlike the optimism analysis, the pessimism comes basically only in the absolute variety. It is also the areas I tend to be most confident, unfortunately. 

Judicial Appointments - This one is not as pessimistic as one might assume. I don't want judges from the right or the left--that is a silly concept. I want judges that think critically and consistently demonstrating good application of the Law. Certainly I expect Biden's typical nominee will be less desirable than was the typical Trump nominee from my perspective. However, the best judges are impartial and well reasoned, and those include very many Biden will nominate. 

Regulation - The Trump administration was flat out good on regulation compared to any recent president (probably including Reagan!). He didn't as much shrink, though, as he reduced or stopped the growth of the regulatory state. Biden will reverse this trend. There is one area where Trump was certainly bad and Biden will likely continue this just in a different flavor--industrial policy/meddling with individual firms and industries. 

Taxes - Many people are rightfully worried about this for mostly wrong reasons. They don't want their own tax rates to go up. Ignoring the fiscal hypocrisy of this given the spending policies these same people typically demand, it is not a major problem that individual income tax rates (especially at the high end) are likely to increase. What people should be worried about is corporate tax rates increasing and to a lesser degree capital gains rates increasing. These are both much more destructive forms of taxes as they are taxing the creation of resources rather than the use of resources. Additionally, the restoration of the SALT deduction and the reduction in the standard deduction are also bad potential outcomes of coming tax policy.

War - I am hopeful that this ends up being an area like others mentioned where Biden today is different than he has been over the last 40 years. Despite this hope, you'll notice in which category I have placed it. 

Woke Politics and Policies - Think of this item as the inverse of Trump's nationalism. The risks are similar including divisive policies and rhetoric as well as censorship and ostracization. 

Spending - Your first thought should be, "Pessimistic on spending? Have you seen 2020?" True, but in only that limited and aberrational case is the relative comparison optimistic for Biden. The ratchet works in one direction generally, and even the possibility of a republican midterm sweep doesn't leave me optimistic.

Presidential Power & Authority - Here is the other side of presidential prestige from above. Every president in the last 20+ years has looked at the prior administrations' advancement of executive orders and general authority and said simply, "Hold my beer". If we only had another branch of government designed to be the strongest branch and willing to hold presidents accountable and within the bounds of their legal authority . . . 

Overall: 

The Biden years will hopefully be a time of surprise at how good some things are, not so bad other things are, and tolerably bad the balance is. This is how I now view the Clinton presidency. All of it is quite relative of course. Hope aside, I am more optimistic than I would have expected being faced with a Biden administration. Still the pessimistic angles are acute and meaningful. 

P.S. What about COVID-19 and the pandemic? While I expect a lot of theater to emerge and a rewriting of some history in favor of the current winners, the substantive part of this large issue is basically settled. In this way it doesn't matter much who won this election. Most of the decisions to be made are in the same incapable hands of FDA and other government officials along with the capable hands of private firms, organizations, and individuals. And in many ways the die is cast. The trajectory of the virus is set--declining regardless of what comes next but with a trajectory that very much can change depending on policy and actions taken. This is true and basically the same under Biden or Trump and even without vaccines. Vaccines are just a wonderful accelerator of the progress against the virus, which very much means fewer people suffering and dying.