April 22, 2017
The New York Times ran a column by Michael Rips that inadvertently called attention to a major tax scam. Rips is unhappy because when artists and other creative workers donate their work to a museum or other charitable institution they can only deduct the value of the materials on their taxes. They cannot deduct the full market value of the work, nor any amount for their labor.
There is a simple reason why they can’t deduct the value of their labor from their taxes, they never paid taxes on their labor in the first place. Suppose a doctor or a lawyer could do work for school and then deduct the value of this work without ever paying taxes on it. This would be a very nice subsidy to the doctors or lawyers, but it doesn’t make sense as tax policy. Nor does it make sense to allow artists to deduct the market value of their work, if they had not already paid taxes on it.
But Rips does call attention to an important discrepancy in the tax code. Suppose a rich person buys a painting for $5 million and then donates it to a museum twenty years later when it has a market value of $50 million. The rich person is allowed to deduct the full market value of $50 million from their taxes, even though they only paid $5 million for the painting.
There is no obvious rationale for this sort of arrangement and it naturally encourages cheating. (Find me an appraiser who will say that my $40 million painting is worth $50 million and it gets me another $4 million off my taxes.) The more logical path would be to limit the person to deducting the original price of the work (perhaps with an inflation adjustment). The rich person could of course sell the painting, pay the capital gains tax, and then donate the proceeds to the museum, but then the museum doesn’t get the painting.
Anyhow, we know it’s hard to be rich, but there is no reason to have special tax breaks like the one Rips calls attention to.
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