What is the right rate of capital gains taxation for art?

Sens. Pete Domenici (R., N.M.) and Charles Schumer (D., N.Y.) have been complaining for the past few years that the capital-gains tax rate of 28% for the sale of art and other collectibles, compared with only 15% for the sale of real estate and securities, unfairly puts art collectors at a disadvantage.

Here is the story.  Here are some fallacious views:

Reducing capital-gains taxes on art to the same 15% as real estate and securities makes sense only if one believes that art is just one more and equally important investment realm. "The government is interested in encouraging people to invest in businesses and the housing market and other areas of risk-taking that stimulate job growth and generate tax revenues, and art doesn’t really do that," said Joseph Cordes…

That view was seconded by Leonard Burman, director of the Tax Policy Center of the Urban Institute, who noted that lowering the tax on art sales could result in "shifting into art and collectibles money that should go to more productive things, which would be taxed as ordinary income. To some extent, people would do that." As an example of more productive use of capital, he suggested investing in a factory or apartment house.

That’s the well-known Junker Fallacy.  Buying art shifts money from one set of hands to another and it doesn’t discourage investment in factories or elsewhere.  (And if it did, investing in houses would involve the same problem, I might add.)  The recipient of the money, the art seller, can invest the money just as well as the spender might have.  Or in other words, the transfer of the arts doesn’t consume much in the way of real resources.  Admittedly there is a second-order effect: higher prices diverts more labor energy into the arts, although for Old Masters this effect is very small.  Or you might cite shipping and transfer costs for the art, noting that on that logic we should tax shopping carts at higher rates as well.

There is a good argument for the higher tax rate on art, namely that art yields otherwise non-taxable pleasures — the pleasure of hanging it on your wall — unlike say holding Chrysler stock.  Or you might think taxing art is another way to hike the tax burden on the rich.  But the cited argument just doesn’t fly.

Thanks to Donn Zaretsky for the pointer.


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