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.
