Mr. President, I rise today to introduce again legislation to eliminate one of the great inconsistencies in the Internal Revenue Code. I would like to thank my colleague, the senior Senator from New…
Mr. President, I rise today to introduce again legislation to eliminate one of the great inconsistencies in the Internal Revenue Code. I would like to thank my colleague, the senior Senator from New York, Senator Schumer, for again working with me on this important piece of legislation.
The bill we are introducing today is designed to restore some internal consistency to the tax code as it applies to art and artists. No one has ever said that the tax code is fair even though it has always been a theoretical objective of the code to treat similar taxpayers similarly.
Our bill would address two areas where similarly situated taxpayers are not treated the same. These two areas are internal inconsistencies contained within the tax code. Internal inconsistency number one deals with the long-term capital gains tax treatment of investments in art and collectibles. The second internal inconsistency involves how charitable contributions of art by the artist are treated under the law.
Long-term capital gains tax treatment of art is inherently unfair. If a person invests in stocks or bonds and sells at a gain, the tax treatment is long term capital gains. The top capital gains tax rate is 15 percent. However, if the same person invests in art or collectibles the top rate is hiked up to 28 percent. Art for art's sake should not incur a higher tax rate simply for revenue's sake. That is a big impact on the pocketbook of the investor.
Art and collectibles are alternatives to financial instruments as an investment choice. To create a tax disadvantage with respect to one investment compared to another creates an artificial market and may lead to poor investment allocations. It also adversely impacts those who make their livelihood in the cultural sectors of the economy.
Santa Fe, NM, is the third largest art market in the country. We have a diverse colony of artists, collectors and
gallery owners. We have fabulous Native American rug weavers, potters and carvers. Creative giants like Georgia O'Keeffe, Maria Martinez, E. L. Blumenshein, Allan Houser, R.C. Gorman, and Glenna Goodacre have all chosen New Mexico as their home and as their artistic subject. John Nieto, Wilson Hurley, Clark Hulings, Veryl Goodnight, Bill Acheff, Susan Rothenberg, Bruce Nauman, Agnes Martin, Doug Hyde, Margaret Nez, and Dan Ostermiller are additional examples of living artists creating art in New Mexico.
Art, antiques, and collectibles are a $12 to $20 billion annual industry nationwide. In New Mexico, it has been estimated that art and collectible sales range between $500 million and one billion a year.
Economists have always been interested in the economics of the arts. Adam Smith is a well-known economist. He was also a serious, but little-known essayist on painting, dancing, and poetry. Similarly, Keynes was both a famous economist and a passionate devotee of painting. However, even artistically inclined economists have found it difficult to define art within the context of economic theory.
When asked to define jazz, Louis Armstrong replied: ``If you gotta ask, you ain't never going to know.'' A similar conundrum has challenged Galbraith and other economists who have grappled with the definitional issues associated with bringing art within the economic calculus. Original art objects are, as a commodity group, characterized by a set of attributes: every unit of output is differentiated from every other unit of output; art works can be copied but not reproduced; and the cultural capital of the nation has significant elements of public good.
Because art works can be resold, and their prices may rise over time, they have the characteristics of financial assets, and as such may be sought as a hedge against inflation, as a store of wealth, or as a source of speculative capital gain. A study by Keishiro Matsumoto, Samuel Andoh and James P. Hoban, Jr. assessed the risk-adjusted rates of return on art sold at Sotheby's during the 14-year period ending September 30, 1989. They concluded that art was a good investment in terms of average real rates of return. Several studies found that rates of return from the price appreciation on paintings, comic books, collectibles and modern prints usually made them very attractive long- term investments. Also, when William Goetzmann was at the Columbia Business School, he constructed an art index and concluded that painting price movements and stock market fluctuations are correlated.
I conclude that with art, as well as stocks, past performance is no guarantee of future returns, but the gains should be taxed the same.
In 1990, the editor of Art and Auction asked the question: ``Is there an `efficient' art market?'' A well-known art dealer answered ``Definitely not. That's one of the things that makes the market so interesting.'' For everyone who has been watching world financial markets lately, the art market may be a welcome distraction.
Why do people invest in art and collectibles? Art and collectibles are something you can appreciate even if the investment doesn't appreciate. Art is less volatile. If buoyant and not so buoyant bond prices drive you berserk and spiraling stock prices scare you, art may be the appropriate investment for you. Because art and collectibles are investments, the long-term capital gains tax treatment should be the same as for stocks and bonds. This bill would accomplish that.
Artists will benefit. Gallery owners will benefit. Collectors will benefit. And museums benefit from collectors. About 90 percent of what winds up in museums like New York's Metropolitan Museum of Art comes from collectors.
Collecting isn't just for the hoyty toity. It seems that everyone collects something. Some collections are better investments than others. Some collections are just bizarre. The internet makes collecting big business, and flea market fanatics are avid collectors. In fact, people collect the darndest things. Books, duck decoys, chia pets, snowglobes, thimbles, handcuffs, spectacles, baseball cards, teddy bears, and guns are a few such ``collectibles''.
For most of these collections, capital gains isn't really an issue, but you never know. You may find that your collecting passion has created a tax predicament--to phrase it politely. Art and collectibles are tangible assets. When you sell them, capital gains tax is due on any appreciation over your purchase price.
The bill provides capital gains tax parity because it lowers the top capital gains rate from 28 percent to 15 percent.
As I stated earlier, the second internal inconsistency deals with the charitable deduction for artists donating their work to a museum or other charitable cause. When someone is asked to make a charitable contribution to a museum or to a fund raising auction, it shouldn't matter whether that person is an artist or not. Under current law, however, it makes a big difference. As the law stands now, an artist/ creator can only take a deduction equal to the cost of the art supplies. Our bill will allow a fair market deduction for the artist.
It's important to note that our bill includes certain safeguards to keep the artist from ``painting himself a tax deduction.'' This bill applies to literary, musical, artistic, and scholarly compositions if the work was created at least 18 months before the donation was made, has been appraised, and is related to the purpose or function of the charitable organization receiving the donation. As with other charitable contributions, it is limited to 50 percent of adjusted gross income (AGI). If it is also a capital gain, there is a 30 percent of AGI limit. Mr. President, I believe these safeguards bring fairness back into the code and protect the Treasury against any potential abuse.
I hope my colleagues will help us put this internal consistency into the Internal Revenue Code.
I ask unanimous consent that the text of the bill be printed in the Record.