How does it work? And what’s the evidence that this is true? People love to say this but I’ve never seen anyone go beyond the surface on the took. The impression I get is it’s mostly people who don’t know what they’re talking about repeating a pleasing idea.
It's used for money laundering, wealth transfer and tax avoidance. You buy and sell art, especially art that permanently resides in freeports, with cash, with shell companies that don't declare their ultimate beneficiary. You then avoid anyone knowing that you paid criminal X or criminal X paid you with the proceeds of crime. You avoid your government knowing that you have $XXX,XXX,XXX of assets stashed away that you're not declaring. You don't pay capital gains tax on it. And so on.
Governments around the world have been passing legislation in the past few years, and putting diplomatic pressure on governments of other tax havens, to tighten scrutiny of these international financial transactions.
You're providing evidence that crime exists, not that art as a whole is "predominantly a tax evasion and racketeering scheme". Where is the evidence that this represents the majority of art purchases?
It's also weird to even call this a tax dodge. If you make money in New York and not London then you should be paying taxes to New York and not London because your operations are using New York streets and New York sewers and hiring kids from New York schools etc., and that's what those taxes are paying for. You haven't used any of London's infrastructure to do it so they don't get any of the money.
If you make money in some free port or <unspecified location> which is so un-tied to any other jurisdiction that you have no meaningful operations in any of them, why should any of them have a claim to the money? None of them have done anything to earn it.
Art is definitely used as a tax dodge by the wealthy, but to suggest that the entire ecosystem is nothing but that is not correct. People that say this usually lack a deeper understanding of contemporary art.
I'm still not clear how this is even supposed to be tax evasion. If you're not operating in a jurisdiction then you shouldn't owe them any taxes. Which jurisdiction is even alleged to be owed the money, and on what basis?
Well, presumably the whole concept of a Freeport is kind of a “hack” against the tax system. These items are treated as if they’re in transit, but they are stored indefinitely.
They're treated as if they're outside of the jurisdiction, because they are. It's not a hack, it's just a fact. It's not even weird. The weird expectation is that areas outside of a given country's jurisdiction wouldn't exist.
US citizens owe the US government taxes on their income regardless where it was earned, barring some specific exclusions. At any rate, where a company is registered or where an asset is held doesn't necessarily have much bearing on where work is done or what infrastructure is used and to what extent.
> US citizens owe the US government taxes on their income regardless where it was earned, barring some specific exclusions.
That seems like the flaw here, not the other thing. Why should the US government have any entitlement to tax activity that occurs entirely outside their jurisdiction?
> At any rate, where a company is registered or where an asset is held doesn't necessarily have much bearing on where work is done or what infrastructure is used and to what extent.
But that's the point. They're meant to tax in the places where this sort of thing happens. If you have a building somewhere, there is property tax. If you make sales somewhere, there is sales tax or VAT. If you have employees somewhere (or are an employee and perform work somewhere), there is payroll tax.
Storing art can be done most anywhere, so naturally it happens in the places that allow it under the most favorable terms, but what's the problem there? It's the same as companies putting their facilities in some other jurisdiction because it has lower taxes. It's the normal and expected thing and one of the rare incentives for governments to improve their cost efficiency through competition.
>That seems like the flaw here, not the other thing. Why should the US government have any entitlement to tax activity that occurs entirely outside their jurisdiction?
Tax evasion doesn't cease to be tax evasion because you don't feel like you owe the government taxes.
Whereas it does cease to be tax evasion when it literally isn't tax evasion, it's tax avoidance. And then people are complaining about this as if it shouldn't be possible, when it should be the default. To owe a jurisdiction taxes you should have to be doing something in it.
For starters, you can purchase and store art in an airport storage area where it never goes through any customs. [0]
Presumably, this is art that will accrue in value, but is (rarely) ever viewed, so is purely a financial vehicle for maintaining and transferring ownership of wealth outside any taxation jurisdiction.
Another game is the ultra rich and famous getting richer. Art is valued not just for its objective aesthetic appeal (ha ha! As if!!) but based on its providence. Meaning who created it, and also its history. Included who has owned it.
If you are Oprah Winfrey, and you purchase some art that only the top 1% of 1% can afford. It is likely that when you sell it, not only will the exclusivity of the particular artifact itself have gained value, but now that his has been owned by Oprah, it will be worth even more. And by modeling the value she places on art, she validates these extreme price levels both when buying and selling, which benefits the whole art world. [1]
Which, in full circle, makes art even more useful as a financial instrument.
This is one of the main reasons that wealth taxes are bad policy. There are many assets that could have significant value, but the value is highly subjective. Since an accurate valuation is impossible and the range of plausible valuations is wide, it inherently becomes a system for arbitrage and distorts investment into whatever assets minimize the tax.
Overestimating the value of hard-to-price assets is massively destructive (people get rid of and make no attempt to acquire those assets because the tax exceeds their value; no more art), but setting their value to zero or otherwise underestimating their value does exactly as you're seeing.
Nearly all other taxes solve this by applying the tax when a transaction occurs and the current value is known in the form of the price being paid by the buyer to the seller.
There's an easy fix for that. You tell the government how much it is worth for tax purposes. If the government thinks you have underestimated it they reserve the right to buy it at that price.
As written on that wiki page it’s completely impractical:
> Others are able to purchase the property from the owner at the taxed price at any time, forcing a sale.
The idea is apparently supposed to “improve societal welfare”, but the reality is it would favor the wealthiest who could afford to have and hold property, while everyone else would be at the mercy of those richer than them.
This is almost certainly never going to actually exist, so this is all idle speculation, but if it was real I don't think it would necessarily play out as you describe. The wealthy would be paying way more in tax than they are now (they have to, or their own assets would be sold as well), which would result in a much more generous system of income redistribution. They'd also need to generate constant cash flow to prevent that property from being sold, so I think you'd have fewer "idle rich" on passive income.
I suspect the stable equilibrium would be a lot more renting rather than property ownership, but also a much more generous welfare state such that this was not a problem, since few people would want/need to keep a house as a store of value.
> The wealthy would be paying way more in tax than they are now (they have to, or their own assets would be sold as well)
That has nothing to do with the concept. The rate of the tax is separate from how it operates.
> I suspect the stable equilibrium would be a lot more renting rather than property ownership
Then the person doing the renting out would be paying the tax (and incurring the associated risks) and passing it on as higher rents. What does that help?
The problem here is assets that are hard to value. Not just in a subjective sense (what is a piece of art really worth?), but in a very practical sense. Take the things we have very good pricing information on -- stocks. If a share of Google is worth $100 and then six months later it's worth $110, but you put down $100 on the form -- objectively its market price at the time -- now someone can lift your shares off of you for a discount because the value changed and they raced to the filing office before you did. Now imagine the same thing but for something that doesn't have a high trading volume or an observable market price at any given time, but can still suddenly change in value over time.
Then it gets worse. Many types of property have a value to the owner which is different than their market value.
Suppose you operate a self-storage company. You have a piece of property which is objectively worth $500,000 where you operate your business. You declare that it's worth $500,000, because it is. Now a competitor can buy it off you for that amount just to grief you, because even though that's the value of the property, in order to move you have to contact all your customers and have them come and pick up their stuff, pay real estate commissions to find and purchase an otherwise identical property to move your business to, shut down your business while you hire contractors to move all your storage lockers to the new property etc.
Meanwhile the competitor just buys it from you for $500,000 and sells it to anyone but you for $500,000 (easy because that's it's true market value), causing you all this trouble and poaching half your customers in the process.
It's the kind of thing academics come up with which has enormous negative consequences in practice.
>The problem here is assets that are hard to value. Not just in a subjective sense (what is a piece of art really worth?), but in a very practical sense. Take the things we have very good pricing information on -- stocks. If a share of Google is worth $100 and then six months later it's worth $110, but you put down $100 on the form -- objectively its market price at the time --
This isn't a problem at all. You can let the brokerage report the value on your behalf. It's weird that you picked stocks specifically, because those are actually very easy to value. That's why your brokerage can provide you with a very precise number that fluctuates every time you log in.
>now someone can lift your shares off of you for a discount because the value changed and they raced to the filing office before you did.
That someone would be the government, and the government would presumably put a bid in anticipation of your filing. When you file your taxes in April 2025 and you say your grand masterpiece is worth $1.2 million, the tax office can be prepared to say "yup, that sounds like a good price to us. Now sell it to us for that price" at the point when you file your taxes.
>Then it gets worse. Many types of property have a value to the owner which is different than their market value.
How on earth is that worse? If you put the property in at market value then the government will not try to buy it from you. They'll be going after the low hanging fruit - the guy who valued a picasso at $1 million, not the guy whose grandmother passed down a family heirloom nobody else gives a shit about.
>Suppose you operate a self-storage company. You have a piece of property which is objectively worth $500,000 where you operate your business. You declare that it's worth $500,000, because it is. Now a competitor can buy it off you for that amount just to grief you
Government, not competitor. If the government employee responsible for finding underpriced assets and bidding on them put a $500k bid on $500k property then their bonus is not likely to amount to much. They'll be aiming for $1 million bids on $10 million property.
Yes, if you let anybody bid on things it could cause more issues which require mitigation. Even then, if you put in a threshold that they have to bid 10-15% over then this would stem abuse. Imagine a competitor trying to "grief" you by overpaying $50-75k for your assets.
Something tells me that you will still object.
>It's the kind of thing academics come up with
Sometimes people who object to the practicalities of a tax are actually objecting to it on principle.
> This isn't a problem at all. You can let the brokerage report the value on your behalf.
How does that help? The value is constantly in flux. They would still have to be faster than the other party (presumably well-heeled large investment banks with fast computers) trying to pick up stocks at a discount to their current value.
Conversely, trying to asses the value non-continuously leads to all kinds of weirdness where people temporarily shift their holdings to more advantageous asset classes on the day the form has to be filed. Or it just provides a method for defeating the tax entirely: On the day before your filing day you sell all your stocks and use the money to buy an assortment of esoterica from your buddy, declare it to have minimal value (because no one else could easily use or sell it), then the next day you sell some other difficult-to-value stuff back to them for the original amount of money and put the money back into stocks. In general people could arrange for the asset someone could deprive them of to be something nobody else would want.
> It's weird that you picked stocks specifically, because those are actually very easy to value.
If someone wants to own 51% of a company, they typically have to pay you a price for your shares above where they're currently trading. But it's really only those last few shares that yield majority voting rights which have that higher value, not all of them. Not even the 49% they don't buy. And yet every individual share is perfectly fungible, so how are you supposed to value them to reflect the amount you could normally get, without giving up the control premium you would be entitled to if a buyer comes who wants a controlling interest?
> That someone would be the government, and the government would presumably put a bid in anticipation of your filing.
This completely defeats the premise of the tax on both ends. You now have the government rather than potential buyers assessing the value of the property, they still have to estimate the value of hard-to-value assets and the whole thing just becomes a game of trying to guess the government assessor's secret estimate of your property value. Not to mention the fun new game where you acquire or create hard-to-value assets that you personally know are not worth very much or will otherwise be overestimated by the government assessor, and then try to come in just under their assessment value so they overpay you for them.
And how is the government supposed to anticipate your filing if neither of you know it's about to happen? If you're in the business of trade you could have bought and sold something in the time it takes them to estimate its value. What happens for a company with diverse inventory and a high turnover rate?
> If you put the property in at market value then the government will not try to buy it from you. They'll be going after the low hanging fruit - the guy who valued a picasso at $1 million, not the guy whose grandmother passed down a family heirloom nobody else gives a shit about.
This is an adversarial process. If you can value a $100M asset at $2M and not lose it unless you go below $1M then that's what everybody is going to do. It would be an entire industry dedicated to valuing property just above the threshold where the government would actually take it, with everyone striving to operate just at the threshold, wherever that is. You can't put a safety margin in because the market will just remove it.
It's like the speed limit. It doesn't matter if the sign says 55, if you only get a ticket at 70 then traffic moves at 69 and anybody who gets ticketed for going 58 is going to be surprised and resentful.
> Government, not competitor.
Then how is this solving the government's problem in valuing things? The whole point is to let anybody do it so the market can decide if someone is undervaluing their property.
> Even then, if you put in a threshold that they have to bid 10-15% over then this would stem abuse. Imagine a competitor trying to "grief" you by overpaying $50-75k for your assets.
They've interrupted your business, stolen half your customers and possibly caused you to exit the market. That could easily be worth $50-75k.
Also notice this is identical to just telling people to overpay their taxes by 10-15% by overvaluing their assets, because anyone whose assets are fungible would just undervalue them by the allotted threshold, and for others 10-15% is nowhere near enough. There isn't any specific fixed margin because the cost of being forced to sell an asset can be arbitrarily large. Suppose you buy a piece of property that you're now using as the terminus for a $100M undersea cable. The property is just an arbitrary acre of land but the $100M cable is now fixed in place.
Or take software for example. The Linux kernel is "free" but how much grief would it cause if people suddenly couldn't use it anymore? Does Linus Torvalds have enough money to pay the taxes every year on the one-time amount old Microsoft would pay to make that happen?
> Sometimes people who object to the practicalities of a tax are actually objecting to it on principle.
Sometimes people who like the principle of a tax dismiss the practicalities.
Of course it is. In many countries there is tax on liquid assets. Thats why these people buy art, cars etc. Things the tax authority cannot easily identify. Its also easy to transport these goods to another country. Its easy to change the value temporarily so you can move funds arround very easily.
I know some people doing it and storing their stuff in Dubai. Tax evasion is number one reason.
