The Gray Market: Why the Trump Tax Cuts Are Killing the Art Market Despite Coddling the Richest American Families (and Other Insights)

Our columnist connects an eye-popping new tax statistic about the 400 richest American families to a surprising downturn in the art trade.

US President Donald Trump smiles. Photo courtesy of Mandel Ngan/AFP/Getty Images.

Every Monday morning, artnet News brings you The Gray Market. The column decodes important stories from the previous week—and offers unparalleled insight into the inner workings of the art industry in the process.

This week, stringing up the trickle-down fantasy…



On Sunday, David Leonhardt of the New York Times held forth on a bombshell conclusion about American class disparity with a blast radius that impacts everyone. According to research by economists Emmanuel Saez and Gabriel Zucman, the 400 richest families in the US paid a lower total tax rate in 2018 than everyone else in the country. And while Leonhardt never draws a specific link between this ghastly stat and the art market, I think the consequences are very real… but not necessarily in the way you might think.

Saez and Zucman’s data appears in their forthcoming book, The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay. To elaborate a bit, the duo claim that the 400 plutocratic families in question benefitted from a total total tax rate—meaning a combination of federal, state, and local levies—of just 23 percent last year. In comparison, the poorest half of Americans paid a total rate of 24.2 percent, and the other income brackets’ rates rose higher.

While some other pedigreed tax dorks (such as Howard Gleckman of the non-partisan Tax Policy Center) dispute the details of the finding, no one with a shred of credibility contests the distressing macro situation it manifests: namely, that the wealthiest citizens have managed to warp the system in their favor to achieve stunningly low rates on their historically stacked fortunes, while all other earners have lagged far behind.

Another point on which nearly every serious analyst agrees is that Donald Trump’s Tax Cuts and Job Act has had a plump orange hand in creating this state of affairs. Passed through a conservative-controlled Congress at the close of 2017, the bill reshaped the American tax code to plutocrats’ disproportionate benefit effective January 1 of last year. (Leonhardt succinctly defines the law as “largely a handout to the rich.”) In fact, Saez and Zucman contend that these Trump-sponsored changes provided the last bit of force needed to plunge the 400 wealthiest families’ rates below those of the rest of the US. 

You might think that this situation automatically benefits auction houses and galleries, especially those at or near the apex of the sales hierarchy. After all, their richest American clients were allowed to keep a stupid amount of money in their pockets after taxes last year, with similar savings in store going forward. That should translate to more sales and resales of high-dollar work… right? 

Well, not exactly. 

Bidders at Christie's New York. Photo by Spencer Platt/Getty Images.

Bidders at Christie’s New York. Photo by Spencer Platt/Getty Images.


Although the Trump tax cuts were, and continue to be, an extended open-mouth kiss to the wealthiest Americans, they also took away a crucial contributor to several years of obscene growth in the art trade, especially at the top end. The Tax Cuts and Jobs Act wiped out so-called 1031 (or “like-kind”) exchanges for every asset class except real estate, and the art market has been suffering because of it ever since. 

For the uninitiated, the 1031 exchange is a provision that allows certified investors to avoid capital-gains taxes when they flip certain assets, provided that they put the sales proceeds into the purchase of one or more assets of the same type within a short time frame. On paper, the logic is that the subsequent purchases boost the economy more than a tax payment on the prior sales would. In practice, it is just another policy ushered in to aid the very wealthy at the expense of everyone who would benefit from a better-funded federal government. (Remember: complexity always favors the rich, because they’re the only ones who can pay accountants and attorneys to hunt down and capitalize on every loophole.)

Until Trump’s tax regime took effect, artworks were among the assets qualifying for 1031 exchanges. This fact was especially valuable because, without making these hallowed swaps, art sales were taxed at the maximum capital-gains rate of 28 percent. (There were, and still are, multiple capital-gains rates triggered by different factors.) 

It wasn’t the tax shield alone that made 1031s so vital to the art market; it was also the speed they demanded. Resellers had to file paperwork identifying their replacement asset(s) within 45 days of offloading the original one(s) and complete the new acquisition(s) within 180 days. These stipulations created urgency and velocity in the trade. Sure, you could hold a work for as long as you wanted. But once you decided to flip it, you had to get the replacement(s) in house fast.

Without digging deeper into the exact machinations, the point was that everybody won—and kept winning. 1031s kept the art market churning, throwing off millions of dollars for American collectors, dealers, and auction houses to catch like they were all inside a money machine that blows a tornado of $100 bills around a glass cube.   

Donald Trump holds up a copy of legislation he signed before before signing the tax reform bill into law in the Oval Office December 22, 2017. Photo by Chip Somodevilla/Getty Images.

Donald Trump holds up a copy of legislation he signed before before signing the tax reform bill into law in the Oval Office December 22, 2017. Photo by Chip Somodevilla/Getty Images.


Unfortunately for the art market, Trump’s tax-cut bill took a sledgehammer to the 1031 money machine, and the so-called opportunity zones that were established as a replacement haven’t provided anywhere near as much juice to the trade. Nearly two years on, the high-end dealers and directors I trust the most have been lamenting the old loophole’s closure with a poignance normally reserved for homeowners who have lost everything in a fire. In other words, we’re not talking about a minor inconvenience. We’re talking about serious pain.

Auction results tell part of the tale. Fine-art sales in the US declined by 18 percent in the first six months of 2019 versus the equivalent period last year, according to the latest artnet Intelligence Report. The first half of 2019 also saw a 35 percent worldwide drop-off in sales of works priced at $10 million and up, AKA the pieces most likely to have been involved in 1031 swaps previously.

As I pointed out a few weeks ago, multiple factors contribute to these contractions. I didn’t call out 1031s at the time because, weirdly, auction sales were up over 20 percent in the US in 2018 per my colleagues at artnet, suggesting that the loophole didn’t make much of a dent in the market early on. 

Maybe American collectors and dealers were just more willing to stomach the capital-gains tax as the cost of doing business back then, before the economy started experiencing more intense drags resulting from the US-China trade war, worsening Brexit chaos, and continued unrest in Hong Kong. (Remember, in a global capitalist economy, problems anywhere can become problems everywhere.) But whatever the motivation, things have shifted, and I’d wager that the death of 1031s play at least a supporting role in the drama.

As a result, it’s safe to say that Trump’s Tax Cuts and Jobs Act has been doubly damaging to the art market. On one hand, it has obliterated what had been a major contributor to growth at the top of the market. On the other hand, it has (predictably) failed to deliver any significant savings to the middle and upper-middle classes, whose retreat from the art trade during our era of widening wealth inequality has helped starve out many modestly sized dealers and mid-career artists.  

So whether or not you buy Saez and Zucman’s headline stat about the 400 richest American families getting a better deal from the IRS than the rest of us, it’s undeniable that the Trump administration has been a “yuge” problem for the art market in the US… and thus, the world. And if the ever-worsening impeachment saga doesn’t remove him from office before November 2020, every American in the art business—or driven out of it for financial reasons—should keep that in mind when the ballot box opens again.

[The New York Times]

That’s all for this week. ‘Til next time, remember: with wealth as with all things, hoarding is an ugly habit.

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