Don’t Pay Taxes / Buy Art
By Raúl Martínez
Every year, as the first snows hit the Northern Hemisphere, thousands of collectors flock to Miami for their winter retreat near the Caribbean. Six months later, many of them are to be found again on the banks of the Rhine, in Switzerland. They travel to Art Basel and Art Basel Miami Beach, the two branches of the world’s leading art fair, where according to some estimates, $1 billion worth of art exchange hands in the span of several days.
The reason such unlikely cities have become major international hubs for the art trade cannot simply be explained by favorable climatic and geographical conditions, as one is lead to believe. Nor is it due to the Swiss efficiency of the fair organizers, of which there remains no doubt. There is however a relevant circumstance, which remains conspicuously absent in most reporting about these fairs: both cities are major tax havens.
It is no secret that the Swiss financial system flourished by safeguarding American and European wealth from the taxman. According to Merrill Lynch’s World Wealth Report, the Alpine country holds around $4.5 trillion, 30% of the so-called High Net Worth Individuals’ offshore-held assets. To a lesser extent, Miami has also become known for offering similar advantages to “prudent” Latin Americans willing to keep assets away from their governments’ “confiscatory” hands. What is rarely discussed is that art is an effective instrument to discreetly move capital across tax jurisdictions. At least it is more sophisticated than stuffing diamonds into toothpaste tubes, as an infamous private banker reportedly did on behalf of a client.
TRAVELLING WITH A PAINTING UNDER YOUR ARM
Houston-based fine art appraiser and consultant María Josefa Velázquez admits that, “countries like Mexico or Colombia have traditionally kept strict controls on international currency fluxes, as part of their war on drug cartels. In the 1980s for example, you could not leave Mexico with $200 without declaring it. However many collectors found no difficulties when traveling with valuable paintings under their arms.”1 Customs agents may be capable of finding drugs in the most unforeseen places, but they are not generally trained to appraise art works.
When asked about his dollar sign paintings, Warhol provocatively responded: “I like money on the wall. Say you were going to buy a $200,000 painting. I think you should take that money, tie it up, and hang it on the wall. Then when someone visited you, the first thing they would see is the money on the wall.”(Bourdon, 384) Had Warhol lived to see the dollar devaluation over the past decade, he might have thought differently. Still, his words illustrate a flagrant reality: To many collectors, art is just another currency, better than dollars in certain economic scenarios.
Like other tangible assets, art has traditionally been a safe haven in times of uncertainty. Art, just like gold, diamonds or real estate, can act as inflation hedge when the value of money falls (including money under the table). As a dealer once told me, “unless you derive pleasure from reading your offshore account statements, it is also a better source of satisfaction.”
A POPULAR CURRENCY
Unlike real estate or diamonds, however, an unlabelled Fontana may easily escape the attention of a tax bureaucrat. “Due to the complexity of conducting art appraisals and the unregulated character of the market, it is certainly a favored currency among money launderers,”2 as Velázquez points out. And if the current surge of gold prices tells us anything, it is that art is likely to continue being popular one, especially now that inflation looms.
Every now and then, the media goes off on a collector caught by the IRS with his pants down, or the rumor spreads that undercover tax agents will visit art fairs, hunting down tax evaders. Such things occasionally happen, and they explain dealers’ fears to provide information about sales to journalists. But even in those cases, it does not normally go beyond a symbolic punishment.
Several months ago, former bank executive Brad Birkenfeld provided U.S. authorities a list of 52,000 clients allegedly involved in a scheme to evade taxes. Guess how many of them were prosecuted? Yes, so far Birkenfeld is the only one behind bars. As Bloomberg News recently reported, his former employer agreed in an out-of-court settlement to pay $780 million to U.S. authorities “to defer prosecution on charges of aiding its clients to evade U.S. taxes,”3 evidence of the coercive power of financial regulation. According to the same Bloomberg News article, the assets held from the IRS by those same clients would be of $20 billion. If that difference doesn’t seem bother the IRS, do you think they are really going to crack down a couple of group overpaying for a slashed monochrome? That would be in really bad taste.
1.&2. Excerpt from a recent conversation with appraiser María Josefa Velázquez in November 2010.
3. See. David Voreacos. UBS Tax-Fraud Charge Is Dropped by U.S. Prosecutors <http://www.bloomberg.com/news/2010-10-22/u-s-ends-ubs-deferred-prosecution-accord-in-conspiracy-case.html>
- Bourdon, David. Warhol. New York: Harry N. Abrams, 1995.
Raúl Martínez is an economist and writer based in New York.