Why does art stupefy otherwise smart people?

What is is about art, that when smart, tough-minded people get near it, their brains turn to mush? I’ve worked in a museum and universities, and studied the former professionally: while management of the latter is often very feckless and lax, museums take the cake. Most recently, but not exceptionally, a board of trustees starring the business élite of New York City has managed to let the Metropolitan Museum of Art go seriously into the financial toilet, despite having assets worth at least $100 billion.

Today we have a lawyer, apparently capable of actual research and inference from evidence and writing literate English, proposing that artists should have a full value deduction for the untaxed value of gifts of their own work, something we fixed fifty years ago.  He managed to get that truly loony and regressive idea (like all deductions, this one is only valuable for successful artists who are already rich) past the editorial page editors of the New York Times. I can see them now, looking at this piece of copy and going all gooey-eyed and misty…”Art! Awww…we love art! Let’s print it!”

OK, Mr. Rips and NYT tough-minded skeptical journalists, how’s this idea?

Janet Napolitano

President, University of California

Dear President Napolitano:

Because of my great love and affection for the University of California, I propose to give half my working hours to Cal as pro bono work, and only take a salary for the other half. Now, I will need you to double my salary rate for the half time I’m on the clock, but this won’t cost you anything. What it will do is enable me to deduct my unpaid time against my new salary under the new rules, which will leave me with no taxable income at all: we can stiff the taxpayers for my whole tax bill! Naturally, I’m happy to give you a cut of this windfall, shall we say 20%: you make money, I make money, the students still get their courses…who could object to this?

I might add, doctors in our hospitals can really clean up this way; in fact anyone who works for a nonprofit or a government agency is looking at a historic opportunity to rip off the taxpaying public, and surely we’re as lovable and deserving as artists whose work sells for hundreds of thousands of dollars, and knowledge and health are as important as art.

Do we have a deal?

Very truly yours,

Michael O’Hare

[my coauthors and I get well into the weeds of this foolishness in Patrons Despite Themselves: Taxpayers and Arts Policy, if you want to follow up. Sheesh.]

Author: Michael O'Hare

Professor of Public Policy at the Goldman School of Public Policy, University of California, Berkeley, Michael O'Hare was raised in New York City and trained at Harvard as an architect and structural engineer. Diverted from an honest career designing buildings by the offer of a job in which he could think about anything he wanted to and spend his time with very smart and curious young people, he fell among economists and such like, and continues to benefit from their generosity with on-the-job social science training. He has followed the process and principles of design into "nonphysical environments" such as production processes in organizations, regulation, and information management and published a variety of research in environmental policy, government policy towards the arts, and management, with special interests in energy, facility siting, information and perceptions in public choice and work environments, and policy design. His current research is focused on transportation biofuels and their effects on global land use, food security, and international trade; regulatory policy in the face of scientific uncertainty; and, after a three-decade hiatus, on NIMBY conflicts afflicting high speed rail right-of-way and nuclear waste disposal sites. He is also a regular writer on pedagogy, especially teaching in professional education, and co-edited the "Curriculum and Case Notes" section of the Journal of Policy Analysis and Management. Between faculty appointments at the MIT Department of Urban Studies and Planning and the John F. Kennedy School of Government at Harvard, he was director of policy analysis at the Massachusetts Executive Office of Environmental Affairs. He has had visiting appointments at Università Bocconi in Milan and the National University of Singapore and teaches regularly in the Goldman School's executive (mid-career) programs. At GSPP, O'Hare has taught a studio course in Program and Policy Design, Arts and Cultural Policy, Public Management, the pedagogy course for graduate student instructors, Quantitative Methods, Environmental Policy, and the introduction to public policy for its undergraduate minor, which he supervises. Generally, he considers himself the school's resident expert in any subject in which there is no such thing as real expertise (a recent project concerned the governance and design of California county fairs), but is secure in the distinction of being the only faculty member with a metal lathe in his basement and a 4×5 Ebony view camera. At the moment, he would rather be making something with his hands than writing this blurb.

7 thoughts on “Why does art stupefy otherwise smart people?”

  1. According to Rips, an artist can deduct nothing more than the materials used. Is that accurate? is it fair?
    He also claims that the law allows those who have purchased art a much greater charitable tax break than is available to the artist.
    That seems a bit dodgy (though not at all surprising).
    Do you find this state of affairs acceptable? If not, what would be a better tax policy?

  2. A tax policy that mimics sound accounting practice would be a good start.

    For example, suppose an artist starts with canvas and paints that cost him $100. (That's a hypothetical figure. I haven't the faintest idea how much canvas and paints actually cost, but $100 will work for the example.) On Monday, he sets up and begins painting by filling in some background. It's a room in a Tuscan villa. At that point, if he's famous, his roughed-in background is worth $1,000 in the marketplace. On Tuesday and Wednesday, he paints a table and chair; on the table there is a vase with a beautiful bouquet of flowers. Now his painting has a market value of $10,000. On Thursday and Friday, he paints a beautiful model seated at the table admiring the flowers. Since the model is also famous, his completed painting is worth $100,000 in the marketplace. So far, of course, the only money that's changed hands is the $100 he paid for his materials.

    In the following week, the artist has three highly regarded appraisers assess the value of his painting, Each, independently, documents the beautiful painting as being worth $100,000, so we can say that's a correct fair market value. On Monday of the third week, the artist donates the painting to the local museum of art. Now he consults his tax adviser to figure out how he can gain a windfall. The tax adviser, being a competent accountant, tells him the following:

    1. If you do your accounting on a cash basis, then you have to regard your deduction on that basis. You started with $100 and no art. No cash changed hands in the intervening time. You ended two weeks later with $0 and no art. Your contribution, then, was the $100 you spent that you did not get back.

    2. If you do your accounting on an accrual basis, then you have to regard your deduction on that basis. But don't forget, you also have to regard your income on that basis. You started with $100, and ended up the second week with a $100,000 painting you created. Since your labor was rewarded by a gain of $99,900, that was income to you. (Note that it's not a capital gain, since it was the reward for your labor, not a passive gain on an asset you previously owned.) The next week you donated a painting worth $100,000, so that donation can be deducted. After offsetting your income from the creation of the painting, your net of income-minus-donation is worth $100 as a deduction.

    3. By the way, suppose you (a) use accrual accounting, (b) use the calendar year as your tax year, and (c) did the painting during the week between Christmas and New Years. Now you have a serious tax issue. Your income occurred last year, and your donation occurred this year. So on the tax return for last year, you have to declare the painting as income of $99,900, on which you will owe tax this year. Not until you do your tax return for this year, which will occur next year, will you be able to recoup the deduction, which will deduct from this year's income. If your income was high last year, and this year you take a sabbatical from working (thus lowering your income), then the tax you pay on your income might be at a higher rate than the tax savings you recoup this year. That gain-and-donation pair of transactions, having the unfortunate coincidence of spanning two tax years, may end up costing you a lot of money.

    I don't know any individuals who do their taxes based on accrual accounting, so it wouldn't generally be relevant. For corporations, however, which often use accrual accounting for all their bookkeeping, split-year transactions often have peculiar unforeseen consequences. In either case, you can see why when large sums are involved, "tax planning" is a very real part of the value of having an accountant help you with it.

    1. This is the correct analysis, I think.

      The $99,900 did not come from nowhere. It was the income gained by doing the work.

      Another way to see the point is this. Imagine the artist had sold the work for $100,000, and then donated the proceeds to charity. He would have $99,900 in income and a 100K deduction, for a net deduction of $100, just like he does when he donates directly.

    2. The accrual accounting is wrong. You never had any income, and the painting was never worth $100,000. Except in very specific instances, with assets that have a fair market value that can be accurately estimated, you value assets at cost. In some instances, you might have to lower that value if there is good reason to think that it has declined, but you don't increase it. The painting isn't worth $100,000 until such time as it sells for $100,000. Your final conclusion that you have a donation worth $100 is correct, but the method of arriving at that is wrong.

      1. I don't think my accrual accounting is incorrect in the context of the original post. Remember, the post mentioned "a lawyer…proposing that artists should have a full value deduction for the untaxed value of gifts of their own work." This "full value deduction" means that they must have established a market value the IRS will accept. That seems to meet the stipulation you stated–a fair market value that can be accurately estimated. Note also that you stipulation conforms to my hypothetical scenario.

        1. Accounting rules are very clear that art is not something for which a fair market value may be estimated. That is done only for assets that are substantially similar to ones that are actively traded in open markets, and even then it can become controversial, as we saw during the financial crisis. Pieces of art do not meet those criteria. The potential for fraudulent accounting if people are allowed to just estimate the value of their artwork is enormous, especially if it has never been sold. This is one of the reasons why the idea floated is a non-starter.

  3. In many cases, the purchaser/donor's deduction is limited to the price paid. https://www.wsj.com/articles/what-you-need-to-kno…. In any case, payment by the purchaser gives at least a clue as to the value of the work.

    Current law lets the artist sell the work and donate the proceeds.

    Otherwise, every donation of art is a new and fresh argument about what the value of the art is. That's a lot of work. Once robots do everything else, maybe we can all serve on juries determining values as lawyers present their cases.

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