The wealth tax and non-profits

That is the topic of my latest Bloomberg column, here is one excerpt:

Or imagine how art markets might be affected by a wealth tax. Rather than keeping their art collections private, many more billionaires would donate that art to museums and other nonprofits. This appears to be a good outcome. But it would exacerbate one of the art world’s worst problems, which is inflated appraisals for tax purposes. At any rate, America’s museums do not have the space or resources to display and look after all of these paintings and sculptures; it is already common for a museum to display no more than 5% or 10% of its collection.

Essentially, a lot of art would be removed from circulation, stored in warehouses largely for tax reasons. Along the way, Christie’s and Sotheby’s might go bankrupt, as well as many art galleries, as the demand to buy art would plummet. You may think that the demise of a few galleries and auction houses is a small price to pay to reduce wealth inequality. But consider that artists, too, need to make a living…

The U.S. has created the most dynamic and effective nonprofit sector in the world. It rests on a delicate balance of private support and some indirect (not too much) government subsidy. America interferes with that balance at its peril.

There is much more at the link.

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I’m feeling edgy today so here it goes: Frankly, I don’t care. I don’t buy that a wealth tax would negatively impact starving artists on average. I wouldn’t shed a tear if Sotheby’s goes bankrupt, and they won’t anyway. Art collection and distribution is overrated. It’s mostly just dumb, zero-added value signaling. Let it burn.

Every economic policy has tradeoffs. Being able to enumerate what exactly the downsides would be doesn't have to be a counterargument, just something to consider in making your moral judgement. If the tradeoff is between a few luxury art markets on the one hand and the prosperity of the American middle class on the other (just hypotheticall; I'm not claiming it's remotely so stark), I know which I choose.

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Art collections would go from private to being warehoused? I don’t get to see them in either case.

This is free market fundamentalist mindset at its finest. Complete inversion of the commonly understood nature of public vs. private goods. "If the government takes away Elon Musk's money and redistributes it, then it will go to waste, because only a bunch of poor garbage people will get to enjoy it, and a worthy human being like Elon Musk won't! So it's in the public interest to make sure billionaires keep their wealth!"

The problem of how non-profit entities are mismanaged strikes me as largely unrelated to the question of a wealth tax. If a museum decides to hide its collection, then as you point out, the public are no worse off than if the art is in private hands. Cowen's bait-and-switch is really bizarre: "non-profits aren't always that great at serving the public, therefore don't tax rich people". Huh?

Yup. Cowen loves concocting a hundred different ways things might go wrong (what if a Van Gogh ends up in a storeroom instead of David Koch's 3rd bedroom?), but never addresses the ways that things are absolutely already going wrong: billionaires with hundreds of billions stuffed in their pockets while American high schools are being shuttered for budgetary reasons.

Nothing absolutely wrong about it. It's not your money to decide what is a better use for it. And showering taxpayers' money on public schools simply lines the pockets of corrupt, incompetent educrats.

It's hilarious that conservatives think billionaires are a better investment than America's children.

Bob, we know that when you talk about investments in America's children you really mean more money for teachers, administration and the teachers union. It rarely translates into any benefit for the children or the taxpayer.

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"If the government takes away Elon Musk's money..."

They won't get much money, if any.

Elon's wealth is in stock he can't sell, either due to restrictions imposed in the stock grants or government restrictions, or because selling would eliminate his control and thus destroy the market value.

Tesla shares are not priced high because Tesla generates huge profits but because Elon gathers highly driven workers to try to deliver the impossible and when they fail, they deliver far more than any competitor.

Force him to sell shares to get cash and Tesla quickly ends up more like GM or Honda, focused on profits and the past, heading to crisis of lost market share, too much capacity, then onto bankruptcy.

SpaceX would get turned into a government contractor bidding much higher prices to get high profits, with all r&d abandoned because the Falcon 9 is already more than enough. SpaceX has virtually destroyed the Alabama cash cows like SLS and $2 billion throwaway rockets to the moon. Totally absurd to design rockets to the moon and back for a mere $2 million a trip, designed/manufactured in California.

The price of shares that define the wealth of Musk, Bezos and others in real world businesses is based on 10-40% profits, which are totally contrary to the driving personality traits they have which inspire workers, customers, and shareholders. Once they are forced to convert shares into cash, the share price will behave like Sears shares over the past three decades.

The leanness of Musk's operation was suggested to me, when down at Boca Chica for unrelated reasons, we remembered we were in SpaceX territory and got out to snap a picture of [what I don't know, maybe the Starship prototype that was in the news a couple months ago?] and found the place ungated and deserted save for a guard, an affable Michael Peña type-character sitting in an old Pinto.

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Why not applying the wealth tax to everyone, including corporations and non-profits? (That’s what Switzerland does and it seems to work just fine.)

Agreed. If I supported a wealth tax (not sure I do, but if I did), I don't see any reason why non-profits should be exempt. Lots of corrupt, vastly wealthy non-profits out there (the Roman Catholic Church, Harvard University, George Mason University and the Mercatus Institute for that matter) whose unearned wealth (i.e. all capital accumulated from rent and capital gains) could be put to better use elsewhere.

Rent, capital gains, and decades of tax-exempt status.

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Most of your comment is pure opinion, so I’ll leave it be.

But in your mind, capital held by nonprofit endowments is idle? Is that your contention, and if not what does “put to better use” mean?

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The Catholic Church has a great deal of real estate which has maintenance costs. The notion that they are 'wealthy' is a fantasy of people who want to steal what they do have.

Oh right, the real estate is a burden.

Anyway, been to the Vatican Museum lately? A few of those baubles could cover an awful lot of those lawsuits they try so hard to avoid.

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Tax the endowments of the Ivy League schools. Then support for a wealth tax in the Ivy League will collapse, and this horrible idea can go into the ash heap of bad economic ideas along with MMT, trade protectionism, UBI, and national minimum wages.

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Catholics, schmakolics: You can take any amount of wealth you want from anybody you want, once! :-)

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"Why not applying the wealth tax to everyone, including corporations and non-profits? "

+1, if you're going to go the wealth tax route you should hit non-profits too.

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When I visited Rothko Chapel in Houston with coworkers to see what the hype was about, an employee guided us to these giant lavender “paintings,” literally a single shade of purple that varied slightly between multiple canvases. She said something about the transcendent feeling that the paintings evoke. My coworker intransigently said “I feel nothing.” It was so quiet you could hear a pin drop, and people were meditating, so it was inappropriate to laugh. My stomach was undulating back and forth about half a foot just from trying to contain my laughter. I had to rush outside where I started cackling like a hyena. The only transcendent experience I had was eating a 48 oz Tomahawk steak later that day.

There was so much money. It gave us some wonderful things (I don't myself include the Rothko chapel among them, or the rest of the Menil either, where on my sole visit thirty-odd years ago I found totaled American cars accordioned to half their size filling the exhibit space; but I ... like that others like it, as it's good for the neighborhood - across the freeway is (was) the "most beautiful street in America" where I go to get the feeling others get from the Rothko, if I'm understanding it aright). But no matter the result, whether we come out the cultural winners or not, it's often easy and only a matter of degree to imagine that we were considered easily-snowed rubes down here. You get that sense at the Kimbell museum of Fort Worth, the prairie town "where the west begins." The building is lovingly presented as the star, and is interesting, rewards the visit. The art one will likely notice not at all. There was - of course - a large Andy Warhol, don't remember of what, except that it seemed vaguely out of keeping. It seems to exist so that the gift shop can peddle Andy Warhol merchandise, which vendors, conveniently, amply supply. Texans: we are little rubes and big rubes. You may consider this my Formula One rant also.

"The building is lovingly presented as the star, and is interesting, rewards the visit. The art one will likely notice not at all."

Sounds similar to the Getty Museum in LA, both its current hillside location and its former location at J. Paul Getty's mansion in Malibu. Great locale and buildings, mediocre art except for one brilliant masterpiece, James Ensor's "Christ's Entry into Brussels in 1889".

It's still worth a visit, but more for the buildings and grounds than for the art.

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And declaring yourself a philistine adds to the discussion how?

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I had the same experience with Rothko. Sat in a big room pretty much alone with three big red canvases for a good 15 minutes and was not transported.

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Kunst? :-)

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Louis XII could be the filthy rich who gave up main-street purchase power to commission Leonardo da Vinci to paint Salvator Mundi. 500 years later another filthy rich freezes $450 million of his purchase capacity, hanging that painting on a wall.
Bad or great?
https://perkurowski.blogspot.com/2018/10/redistributing-wealth-is-not-as.html

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But it would exacerbate one of the art world’s worst problems, which is inflated appraisals for tax purposes.

They inflate appraisals to get deductions to avoid taxes. A wealth tax on assets like art would mean they couldn't deduct art. If they inflated appraisals to much, they would have to pay a large tax. If they lowered appraisals too much, they would have to sell it to bidders. So you'd get much more reasonable appraisals than you do now where art is primarily a tax dodging strategy.

I was also puzzled by that line. Cowen is a master of sneaking these kinds of non-sequiturs into his writing.

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Storage is not a problem.
I would be happy to store some art work at my house.

But, this is more serious. I won't be able to borrow against my art collection to buy that yacht, so when I later donate that appreciated art, I also won't also be able to get a tax benefit.

Do you realize how this will hurt the yacht market? The second luxury home market?

Have to check with my wife first.

Here's a good article on the subject of wealth signaling with art collections:

"Great collectors used to have great taste. Now they simply show off their wealth" https://www.theguardian.com/commentisfree/2017/nov/19/leonardo-billionaires-taste-wealth

Indeed. What is really needed is Elizabeth Warren to write a policy laying out appropriate taste in art.

I think the Sackler's have that market.

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A wealth tax would encourage MORE donations of art (to reduce wealth and avoid tax), and you would still presumably be able to deduct charitable contributions (like art to a museum) against income. So indeed the desire to appraise art even higher would persist.

^^^^ meant in reply to Anon ^^^^ at 2:19PM

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Yes: "would persist". There's no reason it would get worse. It's for deduction against income, not wealth. This is an income (and capital gains) tax dodge, not a wealth tax dodge.

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But consider that artists, too, need to make a living…

Of course most artists don't benefit from the enormous sums poured into the art market as part of the tax dodging industry. It's the tax dodgers and middlemen like art dealers who do. The artists are often long dead. The tax dodgers and middlemen are kind of like grave robbers.

Dead Leonardo da Vinci will never be able to get a share of the proceeds from the sale of his work.

Protect the income of dead artists!

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>It is already common for a museum to display no more than 5% or 10% of its collection.

There are many, *many* museums in the U.S., the vast majority of which would love to display any work from a major artist. That permanently-stored 90-95% you speak of would be the crown jewel in most universities' teaching collections.

As a wise man once said, we should spread that wealth around a bit. Or at least get those works somewhere the public can actually see them.

"the crown jewel in most universities' teaching collections."

More pearls before the swine then?

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Can the little guys afford proper security? You'd get a lot more Gardner Museum style heists.

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Charity will be the biggest loser with a wealth tax. The Billions that Gates Buffet and others who have committed to give their money away at death will be transferred to the Government to spend instead.

Wouldn't it be better for Washington to fund their useless sons with tax receipts than export their corruption?

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The U.S. has created the most dynamic and effective nonprofit sector in the world. It rests on a delicate balance of private support and some indirect (not too much) government subsidy. America interferes with that balance at its peril.

Go ahead and interfere. Here's a suggestion: 60 years after an endowment is founded, your local surrogate's court reviews the history of donations thereto, applying an index to the nominal value of each year's donations equal to the change in nominal-personal-income-per-capita since a given year's donations were made. You can then partition the value of the endowment between a portion attributable to the donations of the founder(s) and a portion attributable to other donations over the years. The former is distributed per stirpes among the founder(s) legitimate heirs. The latter is partitioned among a menu of successor foundations founded during the previous 60 years. The menu will have been drawn up by the surrogate's court a dozen years past from a list of philanthropies which met certain criteria delineated in statutory law at the time and in response to petitions filed by the founder(s), heirs of the founder(s), and by major subsequent donors.

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"Artists need to make a living too"

This feels like a disingenuous statement to end the post. Living artists are rarely the people seeing the largest benefit from Sotherbys' sales, rather it is their agent, benefactor or gallery. The auctioned items with the largest price tags are those belonging to dead artists, who can for obvious reasons not benefit from their sale.

I agree that part of the high end market is driven by tax considerations, but ought this to be so? You present the options as either:

1. The very rich buying art for tax purposes, or
2. Galleries taking in what the rich can no longer afford and stowing them away

Perhaps the current tax system has created this polarity at the expense of art and its consumers(non-rich that is).

+1

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This sentence was copied from the RIAA propaganda manual circa 1998.

"Please disregard the fact that we run an industry with a 100-year history of stealing music from musicians and enslaving others in indentured servitude contracts they can never escape from. We're actually representing the interests of our slav-- I mean, artists! It's the Internet that threatens their livelihood! Something must be done to extend our profits on the works we stole from artists who died 50 years ago! Also, we need government monitoring and censorship of the Internet!"

The good news is that the RIAA lost that fight and music industry profits have never been lower, Hallelujah. Perhaps Cowen is signalling that the current crop of billionaires have reached the same level of desperation. I'm not that optimistic though.

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To the left, that's a feature, not a bug.

They've been supplanting charity and community with the state for decades.

Ah, "charity and community", just like the Roman Catholic Church has been providing to young boys for centuries. It sounds so warm and cozy when you use those words to describe it.

Not that I approve of what the state gets up to. But between "community" and the state, I honestly don't know which one to be more afraid of.

If you cannot decide, then you are a fool. Governments have more concentrated and coercive power than civil associations.

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This is the logic that had the millionaire class pat themselves on the back they spare 0.5% for very public displays of charity, and then lobbied the Reagan administration for a 42 point cut in their tax rate.

The average net worth of a 50 year old in the US is > $1m.

The millionaire is the average 50 year old.

Median wealth for age 50 according to...

Marketwatch: $124,000
Wallethacks: $100,000
DQYDJ: $131,000

https://www.marketwatch.com/story/whats-your-net-worth-and-how-do-you-compare-to-others-2018-09-24

https://wallethacks.com/average-net-worth-by-age-americans/

https://dqydj.com/net-worth-by-age-calculator-united-states/

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The median is $124,000
The average is $727,000

I.e. the millionaire class has so damn much money that the average wealth is 6 times the median wealth.

https://www.marketwatch.com/story/whats-your-net-worth-and-how-do-you-compare-to-others-2018-09-24

Bob, Skeptic doesn't understand the difference between median and average, or may assume the audience or you do not.

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A wealth tax has no effect on the current stock of wealth; it merely changes the price. That, in turn, affects the flow, and that's why the artists will starve

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For the children. I mean, really. There are better arguments against a wealth tax. There are trillions in hidden offshore accounts, so we punish those who didn't engage in tax fraud by imposing a wealth tax on them? Cowen admires the Austrians, so why not the Austrian solution, the market solution, to excessive concentration of wealth? It's efficient, more efficient than a wealth tax. Does Cowen support the market solution? His Austrian colleagues are right down the hall. They can explain it to him.

What is the Austrian solution and why does it work? Genuine curiosity here.

Ask Peter Boettke. One might describe it as the ultimate solution.

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Jeebus Cripes, Tyler. Now you're just moving into fantasyland arguments against the wealth tax.

We get it. You don't like the wealth tax. Now you seem like you're just grabbing at any argument.

Seriously. I mean, I think the wealth tax is probably a bad idea, but I kind of like it more after reading this drivel.

One technique I use to analyze arguments is whether folks are trying to talk the other side down.

It's sort of like when a team plays the Patriots, and the non-Pats fans spend incredible effort explaining why their team can win. When I start hearing that form of argumentation, I assume the side making it is going to lose bigly.

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"But consider that artists, too, need to make a living…"

So old saying is to 'learn to code', new is 'learn tax law'.

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"At any rate, America’s museums do not have the space or resources to display and look after all of these paintings and sculptures; it is already common for a museum to display no more than 5% or 10% of its collection."

They can make some space by returning stolen antiquities to the looted countries =) https://www.washingtonpost.com/news/monkey-cage/wp/2017/08/07/authorities-just-seized-an-ancient-vase-from-the-metropolitan-museum-here-are-the-underlying-politics/

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This makes no sense. They should simply sell some art if they can't make use of it. But let me guess....that added supply pisses off all the art collectors who like artificially high valuations on their collection?

The great thing about being an economist is you can pick and choose which arguments to rely on to support your desired policy position. So in this case, let's ignore supply and demand and instead look at perverse tax incentives (which Cowen doesn't really both to elucidate, but whatever). Since nobody is ever going to hold you accountable, and since economics is not a science, it's all good in the hood.

As a professional economist...I wish you were wrong. But I'm really afraid that you're right.

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It seems we have income vs substitution effects.

The negative income (or wealth) effects of the wealth tax should reduce all forms of giving.

But the substitution effect, provided that donations remain deductible, is positive for giving. The rich may say they would rather have nonprofits get the money (and themselves glory and fame) than President Warren's grabbing government.

Which one succeeds? The very rich often give away their money, so the wealth tax might just speed the process up.

Since Warren is from Harvard, Harvard should be banned from receiving these gifts.

It is not clear the charitable donation deduction will survive. Many progressives are upset that, say, Bill Gates gets to decide how his money is spent rather than the government bureaucracy.

Ah yes, "his" money that he earned as founder and CEO of an illegal cartel (according to the US federal judiciary).

You've made some good points in his thread, but the vast majority of Gates' wealth was earned legally.

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I’d love a quote from the DoJ establishing that Microsoft ran anything remotely like a cartel.

Unless you’re just throwing terms around you don’t understand.

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But they'll spend more on PACs because consumption is a substitute for wealth accumulation. This and the NYT flying link just today are two new low points for Tyler's willingness to think like an economist when things he reflexively likes are at issue. (wildlife tourism is a meaningful constraint on cattle grazing expansion in Africa/SA, really?)

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Wait what? The wealth tax would cause MORE people to inflate the value of their art for tax purposes? Wouldn't it do the opposite since it would create an incentive to undervalue any art you own?

And more importantly, wouldn't the result of the scenario you describe be that art prices would go way down? If anything it seems like it could make it easier for more people to have some "high art" on display, while making it a lot less appealing for anyone to stockpile far more than they could actually display.

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You're really putting your back into pushing against a dumb and impractical proposal that will never see the light of day. Maybe there's just not much to say about economics these days.

There was a time you could say that about ACA.

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"The struggle is real. A just-released survey of international artists yields some dismal findings: In the US, a full three quarters of artists made $10,000 or less per year from their art. Close to half (48.7 percent) made no more than $5,000."

ARTNET

So sure, artists are really pulling down the big bucks, because of billionaires and whatnot.

Gotta love Cowen really pushing the limits of the prosperity gospel to argue that billionaires helping artists, when the starving artist is literally the cautionary tale that every parent tells every college-bound child.

I think what we should do
To solve poverty
Is to
Declare
Every poor person an artist
So that the wealthy will help them.

That’s a lovely haiku

Indeed

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there should be an "art" tax. that should take care of everything.

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This is a perennial argument against any proposed tax or regulation.

The market economy is a robust engine of prosperity, something so natural to humans that it can't be stamped out even with the zealous forces of Communism.

Yet...it is a delicate thing, liable to collapse into dystopian poverty with the introduction of virtually any tax or regulation.

Great comment

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Weren't the same arguments made about the increase in the standard deduction? Charities would lose? Where is the death of charity? (Yes, subtle differences, but we've learned that really bad outcomes don't seem to appear as often as projected by economists--Brexit, Trump, trade war, or for that matter stimulus and inflation, Obama tax rates, etc)

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This is a keeper. If a wealth tax comes, then I'll bet that few, if any of TC's bizarre predictions come to pass. TC lives is a different world than mine, in my world the difference between a billionaire displaying art in his/her home and the same art work being hidden away in some museum sub-cellar is a couple of dozen of people seeing the art or not. Certainly not worth wringing hands and whining about. And apparently TC lives in a world where most working artists have works in museums. I'd like to see the data for that, as well as the data demonstrating that the art auction houses are dependent on museum quality art transactions for their existence. I am a bit confused tho: if billionaires dump their art, (because it costs too much to keep - we're talking billionaires here and costs they feel are excessive, but I digress) then supply will increase and so price will decrease allowing me to buy that Matisse I've always wanted. And this would be a bad thing why?

Consider the unthinkable. Museums could expand their showrooms. Cthulhu awakens.

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Surely the more pressing issue with nonprofits will be very wealthy people shifting their assets to non-profit charitable foundations conveniently run by their relatives, as already seems to happen more in Europe, see Ikea and Lidl for examples.

The problem with taxing nonprofits, as I calculated in a prior comment about this subject, is that, for example MOMA doesn't even calculate their art's value. That being the case, if you look at their current balance sheet, if you tax their assets on that sheet, you add 15% to their operating expenses. That's before you ever start talking about their art. I think a lot of nonprofits will have nowhere near the cash flow to keep significant assets subject to wealth tax. Though this might have the paradoxical effect of crashing the price of those assets, because fewer people will want to hold them.

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Snooze... another boring, pointless analysis by Tyler

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If we could trade a little art visibility for universal pre-k... I'd do it every day of the week.

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Another thought. Isn't Tyler the one who says charity should be anonymous?

Much nonprofit activity is reputation repair. other taxpayers shouldn't be underwriting that anyhow.

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