Wednesday, October 22, 2008

Becoming Chaos Compliant

I spent this morning supervising the crating of the first of my Dangerous Career BabesThe Aviatrix – to be shipped overseas. It's not an easy job. Enamel's glossy, brittle surface is vulnerable to chipping and scratching and I've learnt to wrap corners and edges well to reduce the risk of damage. Even so, the safe delivery of my works is always nerve-wracking.
The Aviatrix
is to be included in an auction of contemporary Australian art organised by Christie's , in London, in December. Last year, two of my early enamels, each 1.0m x 1.5m, were snapped up for just over $A23,000 each. This new work is 2.0m x 1.6m and should sell for considerably more, even in a more cautious and conservatively valued market. However, recent art auctions in London have cleared less than 60 percent of the catalogued lots and even marquee artists such as Lucien Freud aren't achieving the prices they might have a year ago.
In Australia, mainstream commercial galleries are hurting. There are rumours that some have not sold a single work since early this year. I'm not so sure that this is only because of the global economic slow-down. 'Bricks and mortar' galleries have been slow to pick up on radical shifts in the way collectors are staying in touch with both new and established artists and their work online. Their managers remain elitist in outlook, relying on long-established collector bases and traditional, infrequent, and un-individualised communication using old media to support sales. They've been unimaginative in laying the groundwork to encourage (and, in some cases, create) new collectors – in other words, investing in potential future revenue.
If, as is widely thought, a global recession is inevitable, it's likely the only galleries and artists who will weather it well are those who are already bold, inventive and flexible – who have become, as one high profile, Nineties' web entrepreneur once put it, chaos compliant.


Anonymous said...

I think we are in a global recession the depth and breadth of which has yet to be unfurled. I would think that people will cut back spending on art and market values will have to adjust to decreasing demand. It will be tough times for the art market but I doubt we will see any gallerists begging on the streetl. However many artists may have to turn to alternative jobs to make ends meet for awhile.

Enterprising Hazel is well placed with Legends and her special no holds barred approach and may even become more daring in response to the financial negativity abounding lately.

When the going gets tough the tough get going.


Mona said...

I have a problem with people who buy art as an investment. But then I've never been rich. Anything that I have bought (and here we are probably talking about a max of $300 spent as that is/was all I can afford) I still have because I bought them for a reason. They moved me. Not also being an artist myself I think it is unfair that artists don't get a commission on the re-sales, but how that would be fixed I don't know. It is crazy to think that there are more art galleries than milk bars! Hazel - I do like your idea of bypassing the gallery system as much as you can...

artcanyell said...

Mona: Heres is some info I have on that issue:

Resale Royalties
The proposed legislation for Resale Royalties (Droit de Suite) is entering a new phase. It's a matter of serious concern to me both as a dealer and a collector, as to all dealers, artists and collectors. Below are some thoughts. Feel free to respond.

Charles Nodrum
October 2008

Some background

According to the history, Droit de Suite arose in France out of two concerns.
First, the case of the widow of a famous artist living in poverty - and thus bringing shame to a nation that prides itself on its cultural values and respect for the arts; it was felt she deserved support.
The second case involved a generous collecting consortium who were happy to see the artists participate in any gain (a clear case of a profit sharing system).
There can be little doubt that the initial impulse was essentially egalitarian in intent in that it aimed to assist the less affluent.
Then there was a subtle shift. What had started as a desire to honour the family of a respected dead artist, on the one hand, and, on the other, to share in the upside in the case of the living, became an obligation to pay a fee to all artists, regardless of personal circumstances, or profit and loss. This appears to have been based on the notion that all artists would benefit.
Such is not the case. First, as currently operating, the dead benefit more than the living - and this seems universal. In France 75% of Droit de Suite raised goes to the estates of Matisse and Picasso, and five other artists. In Australia the top-selling modern painters are the likes of Boyd, Drysdale, Nolan, Olsen, Tucker, Whiteley, Blackman, Williams, Brack, Smart, etc. Of these only three are still alive.

So the original intentions have been largely skewed. For the artists still living and working, those with strong primary markets have strong secondary markets. All of the above painters had (if dead) and have (if alive) solid re-sale performance, either through dealers or auctions, and this nexus has tended to apply universally for years.
With resale royalties, sheer arithmetic bears down. Of necessity, it would put most money into already well-filled pockets. Conversely, whilst the middle-earning artists will receive middling assistance, the lowest earning will get little - or nothing if we believe the claims from the accounting world that the bureaucratic processing of royalties for works of low value becomes uneconomical.
So where the need is strongest the system does least to help, thus undermining one of the implied initial intentions to help the financially less successful artists.
Aboriginal artists in particular could benefit but this would need specialist advice in maintaining coherent and overriding government policy.

Some basics

When money changes hands, it is essential to make clear who is paying who, how much, and what for.

The 'who':
The proposed Resale Royalty will have to be the financial responsibility of either the buyer or the seller, or both; hence it will either be taken off the proceeds from the seller, or added to the cost for the buyer, or divided on a pre-agreed proportion.

The 'what for':
If the seller is responsible, then the question arises as to what they are paying the artist for. They have paid the artist once (on initial acquisition) and are now being asked to pay again. Why is once not enough?
If the buyer, then a more plausible answer can at least be suggested: for the right to enjoy this work for which you yourself have not paid the artist.

The 'how much':
The agreed percentage will be difficult to justify on any absolute terms. However, it would seem that if the vendor is responsible, it should be taken off their net proceeds, and if the buyer is responsible, then it should be added to their gross cost.

Definition: if classified as a financial levy, it can presumably be exempt from GST.


Option 1
discusses a profit sharing system. Fair, but difficult to operate.

Option 2
discusses royalties on a flat percentage rate, with and without a sliding scale.
All Artists under the scheme (and/or their estates/beneficiaries) would be paid royalties.
Pros and cons.

Option 2b
A more radical option of extending the scheme to all works of art.
When the artist's rights expire (50 years after death) beneficiaries would cease to receive any royalties and all monies earned on all works sold would go into a designated Art Fund.

Re Option I - Profit sharing

The idea was simple enough and the solution (or variations within it) is still the fairest:
When a work of art is sold, the artist would receive a percentage of the (net indexed) profit.
This is how CGT worked and seemed reasonably acceptable. The system would proceed on through all subsequent sales, with the artist benefiting each time a profit is made.
So, on a painting sold in 1985 for $5,000 re-selling in 1995 for $15,000, the artist would have received a percentage of the $10,000 profit; and if it sold again in 2000 for $20,000, then the artist would have received the percentage on the subsequent $5,000 profit. However, if it sold in 1995 for $3,000 (at a loss) then the artist would have received nothing as no profit had been made; but if it later re-sold in 2000 for $20,000 then the artist would have received the percentage on the $17,000 profit.

Whilst this system is fair, its chances of survival are poor.
First, it needs to be indexed because the inflationary spiral on capital goods has been unprecedented. However indexing requires complex calculations - and has since been dropped from CGT in favour of a simple 50/50 system. Next, it needed the seller to disclose their purchase price - and many would see this as potentially infringing their privacy; (this might not be the case if the vendor is responsible, but would be if the buyer is responsible, since the buyer will have a right to know where their liability starts); in short, it invites non-disclosure and it is easy to see sellers 'forgetting' and thus putting a dangerous strain on the collection system.

Those who oppose this notion tend to maintain that a re-sale royalty is an artist's right over their moral property and thus has nothing really to do with profit. Indeed simply naming them 'royalties' tends to re-affirm this, since royalties are not normally levied on profitability. Whilst this remains a respectable position it is far from clear that it holds much public support. Many remain convinced it does have very much to do with profit. For the most part, artists have, if anything, only wanted part of the action when a serious profit was made. This is understandable in that it ties in with universal attitudes towards profit in general, particularly in relation to tax liability. If anyone buys anything for $x and re-sells for $x, they make no profit so pay no tax. The supporters of the 'moral right' position mentioned above will probably need to liken the royalty to an impost such as stamp duty (so payable regardless) but will still need to confront a variation of the 'what for' question: what has the artist done to actually, in practice, merit the payment? If the price is stable (or lower) then it is hard to find a satisfying answer; however if a profit is made then there is a plausible reply: the artist has worked hard, built a strong reputation, underpinned this with sound marketing, etc all of which is playing an essential part in the improved value of the painting.

However, such a profit sharing system, even if intuitively acceptable on the grounds of fairness (and even here it is not universal) would still prove problematic. Even if modified to exclude the indexing, it would still require declarations to be made which could prove too hard to trace and/or verify, particularly over long periods of time, for which many works of art are held.

Re Option 2 - Standard percentage system

On this system, the closest analogy we currently operate will be the stamp duties and transfer taxes paid on property and cars, though with the proceeds paid to individuals rather than the public purse.

If a flat percentage is applied across the board, simple mathematics will result in the most successful artists reaping the greatest benefits, thus undermining any sense of egalitarian virtue inherent, or implied, in the system. This potentially embarrassing consequence can be simply avoided by putting in place a descending percentage system: thus, for example, if 4% were to be charged on the first $200,000, 3% would apply from $200,000 to $500,000, 2% from $500,000 to $1M, and 1% thereafter.
There are several argument against this.
First, is that it effectively penalises artists for being successful. Whilst this might be understandable if money was coming from public sources, this is not the case, so it needs to be made clear why the artists are having their income limited. The fact that their incomes are already high is not, in this instance, a persuasive reason. Financially successful artists might be rich enough, but their clients/collectors are richer still, and a sliding scale will in this case simply benefit the very rich collectors to the detriment of the relatively rich artists. Furthermore, such royalties would add handsomely to already high incomes, and would be taxed accordingly, thus putting some money back into the public domain.
Second, it flies in the face of other related systems. Stamp duty on houses, for instance, does not go down in relation to value, it goes up. A $10M mansion incurs a higher percentage than a $300,000 house, on the simple principle that if you can afford $10M you have the wherewithal to pay extra. (Indeed, if the royalty is to remain in line with general practice, it should be on an ascending sliding scale: the higher the value of the work, the higher the re-sale percentage)
Finally, and probably less significantly, as far as art collectors as a group are concerned, its effect is to give a financial advantage to the wealthiest: percentage-wise, one pays less on a $3M paintings than on a $3,000 painting and some people find this as slightly absurd.
So whilst a flat percentage might initially appear to disproportionately benefit a small sub-group, on closer inspection it seems to be a better option than a sliding scale.

If the system is to mirror Copyright rules, then it will apply to estates and beneficiaries for 70 years after the artist?s death. There will be serious bureaucratic work involved in tracing the beneficiaries of a number of artists (James Jackson, d 1975, or Ernest Buckmaster, d.1968, for instance, but many, many others) whose work is still well within the copyright net. Such artist's works continue to sell soundly and generate worthwhile turnover, yet their estates might prove difficult to trace. If the system is to operate properly, Royalties would have to be charged on all such artists' work so the question arises as to where such monies will go if beneficiaries cannot be located. Presumably a Fund will have to be established to hold all income pending distribution.
If this problem is to be avoided, the Royalty can simply be applied to living artists. If so, it undermines the first (historical) incentive for its introduction, namely the desire to assist the deserving widows (and children) of dedicated but financially unsuccessful artists. However, that historical element is of marginal relevance in the here and now, so this would probably prove the simplest solution.
At least to start.

In France, Droit de Suite was only raised on auction sales. In Australia it is proposed to include dealers as well. This seems eminently fair, since no clear reason can be offered for giving preference for one method of sale over another. However, there have also been suggestions that private sales between individuals should be exempt. For precisely the same reason, this can be seen as eminently unfair. Why should a buyer, or seller, be penalised for employing an agent? Conversely, why should the artist be excluded from what would otherwise be their rightful income? If two people conclude a private sale (i.e. excluding an agent, be it auctioneer or dealer) on a property or a car, they save the agent's sales commission but are not exempt from stamp duty or transfer tax.
The analogy can equally apply with art.

The next practical problem centres on the minimum value for eligibility. In Europe this is currently 3,000 euros (say $5,000). Whilst this makes for bureaucratic financial simplicity, it can also be criticised as yet another sad example of the elite dismissing the lower orders by effectively defining them off the map. Suggestions for the Australian model are much lower ($1,000) and whilst this will include a far greater number of sales, and hence benefit the lower income artists, it will also prove a serious headache for the dealers and auctioneers whose job it will be to collect and classify the money.
One option could mitigate the problem: simply apply a minimum payout, say $500(?) - to each artist. So if an artist has slow but steady resales of works in the $1,000-$5,000 range, they will steadily accumulate until the minimum is reached, at which point payment is made - even if it takes years. This would presumably be well received by artists in that category. Even if the accounting is relatively expensive, it would go a long way to building a sense of fair play and even-handedness.

Another problem that has caused difficulties in Europe is the status of eligibility ie who can receive Royalties, and who not. The trade have been (understandably in the circumstances) concerned that there is no reliable and definitive list available publicly. To avoid resulting ambiguities, the simplest solution is to require all eligible artists (and estates) to apply to the distributing agency and register their interest; where this is not done, they would receive nothing. However this risks causing distortions in the market, with the works of less efficient (i.e. unregistered) artists being free of the Royalty. The solution here would be for the distributing agency to ascertain who is eligible and list them on their official website; where an artist fails to register, all proceeds from their re-sales could be placed in a common fund for, say, distribution to suitable arts organisations.

Re Option 2b - extension to all works of art

It is usually accepted, world-wide, that re-sale royalties should apply for the life of copyright.
The obvious anomaly this creates is to build in a financial incentive (albeit small) to purchase works of art by long-dead artists. Buy a Picasso, and Droit de Suite is payable; buy a Monet, and it won't apply. There is an arbitrary element to this, which many find uncomfortable, at least when looking at the matter in principle, rather than just in practice. One can legitimately ask: Where is the essential justice here? From a more practical point of view, is it wise to put in place any system which, in effect, gives financial preference to one artist over another? This is particularly awkward when the preference is to the dead rather than the living: in the Australian case, you'll pay a percentage if you buy an Olsen, yet pay nothing if you buy a McCubbin.

A radical solution would be to apply a flat-rate Re-sale Royalty to all works of art sold in Australia.

For either the artist's lifetime, or the copyright lifetime (regardless of which is chosen) all Royalties would be paid to the artist (or their beneficiaries). On the death of the artist (or expiry of copyright) royalties would all pass to the Common Fund.
It would apply to all works of art regardless of value: all proceeds from works outside the net (out of copyright, or below the lowest value threshold) would automatically go into the Fund.
If, as discussed above, an Artist's Lifetime Royalty is bought into being, there may be no need for such a fund, at least if the system works perfectly; but no system works perfectly and some artists will prove hard to track so a trust fund of some sort will almost certainly have to be set up. If a Copyright Lifetime Royalty is put in place, the need will be stronger as artists, estates will prove even harder to trace. If the system is fully overhauled to apply to all works of art, then a fund will certainly be necessary. This is extra bureaucratic work, but at least the necessary structures are in place anyway.

The Fund created could have as its prime purpose the distribution of its revenue to public galleries (state and regional, and maybe university and municipal) for the exhibition and acquisition of works of art by living Australian artists.
This would plough back into the system the money extracted and, in all likelihood, indirectly spread the benefits to a wide group of artists, if 'living' is included in the charter.
As far as percentages are concerned, this would be an added incentive to apply a lower flat rate. A sliding scale would miss the opportunity to generate revenue for public institutions. It would also be the opportunity to remove any low-value threshold, assuming a threshold will have to apply at some level: all items could pay the Royalty, with sums allocated to individual artists where applicable and all the remainder entering the Fund.

Over the years, this could generate a serious income flow. In addition it would quite likely be happily, rather than resentfully, paid: art collectors are keen gallery visitors, so each time they pay, they at least do so knowing they are directly contributing to the public gallery system from which they benefit.

It will also smooth out the anomalies brought to light above.
Applying it to all works would at least eliminate any financial incentive to buy a Glover rather than a Boyd and thus have the ancillary benefit in levelling the playing field which the introduction of a re-sale royalty on living artists would tend to tilt.
Applying a flat rate would counter any criticism that the most expensive paintings were effectively charged a lower fee than the less expensive. The practical benefit here would be that when a Von Guerard sells for $2M the royalty would generate a serious sum for a worthwhile cause.
Dealers and auctioneers might initially baulk at this further bureaucratic and financial burden, but may come round on further reflection. There would be no need to classify eligible and ineligible sales, be it on copyright or threshold: the sole obligation would be to simply send in a list of all sales matched to the respective artists; the agency then distributes this either to the artists or into the Common Fund.

There could be a useful political spin-off also.
The money generated would strengthen the financial independence of the visual arts in general.
It is often a problem for governments to justify spending on special interest groups; they always manage, but it can often cause unease amongst those whose interests lie elsewhere. The growth of such a Fund could help alleviate the problem, since it makes no claim on public money.
It could also prove a milestone in arts policy. To date the Royalty proposals have been limited to looking at overseas models and copying them as best we can. This in turn can be seen (perhaps harshly, but not altogether wrongly) as yet another example of cultural cringe and import fetishism.

Concluding thoughts

Whatever course is taken, its popularity will not be universal. There are prominent artists who don't support the idea of Resale Royalties, and many others who are indifferent. Auctioneers and dealers will resent it because it means more work for less pay. Collectors in particular will feel, at least in part, aggrieved: works they have bought will have their value cut.
It is unlikely that their interests will receive a careful hearing, but were they to merit attention (and it would be wise to do so: they are the ones paying the money that make it all possible) one solution would almost certainly receive widespread approval.
Apply the Resale Royalty to works acquired (not made) after the introduction of the legislation.

There have been concerns raised as to the constitutional validity here and to date the legal opinion seems to be divided. But quite independently of such legal issues, a comparison with Capital Gains Tax might prove useful. When it was initially mooted, the very idea filled many with fear: assets they had carefully acquired risked being slashed by tax. Yet there was broad agreement that something of its type had to be brought in, so when it was, one reason it came in with relatively little pain was the fact that existing assets were quarantined. As a result, no one could complain that their existing financial structure had been compromised; nor was the legislation tainted with being retro-active. If the same policy were applied to Resale Royalties, collectors would most likely respond in a similar way. The value of the works sold would still probably fall slightly, since the buyer would need to factor in the fact that when they on-sold at a later date, the Royalty would have to be paid, so moderate their buying accordingly. However it would have the benefit of spreading the cost over two transactions.
The downside of this policy is obvious: immediate income would be minimal - and take time to grow; but given the turnover on the market, it would steadily rise as works are on-sold. The transition would be gradual, so relatively painless. It also minimises the risk of collectors sliding away from modern and contemporary art in favour of (broadly speaking) 19th century painting just because of resentment at having the rules changed in the middle of the game.
Finally: timing. Timing is everything. Bringing in such a scheme on the eve of what appears to be a looming global recession would, in most industries, be seen as particularly dangerous. Imagine putting an extra 5% on stamp duty on property transactions just when property values are experiencing serious pressure. Property owners and real estate agents would hit the roof or sink through the floor. At least if the post-legislation proviso is applied to Resale Royalties the thousands of collectors who have bought works of art won't harbour resentment at having 5% wiped off their value; even if they resent its introduction in its modified form and are therefore more cautious about buying in future, well that's their choice. But it's a conscious choice, and not an obligation imposed from outside.

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Anna Roberts said...

I searched the blog, curious to see if Hazel had written anything about it already, and she did, a couple of years ago. Sorry that I don't know how to hotlink, you'll have to cut and paste . I found it an interesting perspective.

Mona said...

Hazel - Everybody on Bloggers comment format has changed and it's not for the better!(not user friendly) If you go to your settings and switch to full page comment it may revert to the old style!!

Mona said...

Phew! A bit too much to take in at this time of the night but I shall sleep on it and get back to you...

Anonymous said...

It's too bad that an exhibit of all the
Dangerous Career Babes together
was not possible.

That would be a sight to see!