Redback - Commentary

                   The Queensland branch of the ACGA is opposed to introduction of a Resale Royalty scheme as proposed in the Myer Report.  We understand that some ACGA members who are in favour of this scheme already implement a resale royalty arrangement for resales of their artistsí work. This usually operates through a rebate to the artist of the usual commission charged on resales through the gallery.  While this is a most commendable and generous procedure on the part of the gallery, such a procedure is quite different from the one proposed in the Myer report.

The Qld Branch considers that the proposal in the Myer report should be opposed.  This paper examines three of the major findings of the Myer Report, which underpin its recommendation that a Resale Royalty should be introduced.  Each of these findings is examined in turn and this examination suggests that the findings are fundamentally flawed and are insufficient to back the recommendation that a Resale Royalty scheme should be introduced.  After the discussion of particular findings in the Myer Report, some further comments regarding the Resale Royalty scheme are supplied

Major findings of the Myer Report include:

1. If resale royalties were introduced, a substantial amount of benefit would be enjoyed by artists, as estimates indicate that resale royalties calculated on 1999-2000 sales would amount to approximately $6.75 million.  
 

Comment:

The problem with this finding is that it makes no attempt to disaggregate the group of artists who would benefit from the distribution of the royalties.  Much art sold in an artistís life is never resold through commercial facilities (auction houses and commercial galleries ­ the organs through which resale royalties would be imposed and collected).  Only a very few artists are so successful that there is a demand for their work later in their lives at auction or through commercial galleries.  This is supported by evidence within the Myer Report itself, which states:  A study conducted for the French Government calculated that in 1995, of the 2500 beneficiaries of droit de suite 288 (or just over 10 percent) received 60 per cent of the royalties, while the remaining 90% received just 40 percent of the royalties.  Even if one ignores the obvious disparities in distribution only 2880 artists in France received any benefits from droit de suite.  How many artists are there in Australia?  In the report Artswork prepared by the Australia Council in 1997, it noted that Of the 40,000 practising professional artists, 33 per cent are visual artists; i.e., in 1997 there were over 13,000 practising visual artists in Australia. France is, of course, a much bigger country in population terms than Australia.  Assuming that participation rates in the visual arts are similar in Australia and France, it is clear that only a small proportion of artists actually receive any benefit from droit de suite and that these benefits are clearly heavily skewed to an even smaller proportion of those receiving benefits.  This is hardly neither equitable nor likely to be seen as a sensible implementation of a "superannuation scheme" for the great proportion of visual artists.  If a major objective of the resale royalty is to supply a "superannuation scheme" for artists as suggested by the Myer Report then a Resale Royalty scheme would clearly fail to produce anything which is likely to be seen as viable, fair and equitable.  Further, if superannuation is an issue then a more profound and encompassing proposal than the resale royalty one needs to be developed. 

2.  While theoretically there would also be a transfer in wealth from the early career of the artist to the later life of the artist, the Inquiry does not believe there would be an appreciable impact on markets in practice.
 

Comment

The Myer Report makes the point that the empirical evidence for an appreciable impact on the art market is lacking.  Empirical evidence would, of course, be difficult to obtain just as empirical evidence to show that global warming is caused by industrialisation is difficult to obtain; but few credible people now argue otherwise and the contention is backed by scientific modelling procedures.  

An analogous situation exists in the case of resale royalty effects.  An eminent economist such as Dr Jon Stanford, senior economics lecturer at Queensland University and President of the Queensland Society of Economics, has shown in an Occasional Paper published by Queensland University that a resale royalty would have the effect of transferring income from young artists to older and more successful artists.   It is difficult to argue that such an effect is fair and equitable.

 The proposition is also backed up by anecdotal evidence.  The following statement was recorded by a member of the Queensland Branch in a conversation about Resale Royalties amongst collectors and dealers: I just must say that if I am thinking of buying 10 paintings, 8 of which may never sell or sell at slightly more than my purchase price, what is the incentive for me to buy 10 paintings? Maybe I will buy four or five to reduce my risk. What does that do for the artist? She or he must sacrifice the sale of several works now in order to collect a royalty that may never be realized.  Such comments support the Stanford contention that buyers of art are rational in their decision making and will consider economic issues when making art purchases (as well as making aesthetic decisions).  Queensland Branch believes that evidence exists from an economic modelling perspective and anecdotally to support the contention that the Resale Royalty proposal would result in a transference of income from younger artists to small proportion of successful older artists and clearly this would have a practical impact on markets in practice ­ negatively on the income of younger artists.

3.   As demand in the art market is highly volatile, it is unlikely that resale royalties would have an impact on the art market over time.
 

 Comment

It is difficult to follow the logic in this finding.  High volatility is indicative of large movements in markets ­ volatile markets can move rapidly upwards on the receipt of "good news" and rapidly downwards on the receipt of "bad news".  Volatility is not a measure of resilience or the ability of a market to absorb shocks.  In fact, one would be inclined to argue that a volatile market might be more likely to react badly to the imposition of a new cost than be able to absorb such a cost.  (The effects on the housing market of the GST are a prime example.  Many builders became bankrupt as a result.  The housing market only recovered as a result of lower interest rates and the introduction of the First Home Buyers Scheme).  

We agree that the art market can be volatile ­ even more so than most other volatile markets.   The art market, like other volatile markets, can overshoot to the upside and the downside.  It fell heavily during the early 1990ís and auction sales did not recover to their 1989 levels until late in the 1990ís ­ a ten-year recovery cycle.  This recovery was much slower than the recoveries in the share market and the housing market ­ both markets known for volatility.  The Myer Report in support of its contention that the art market would not be impacted by the introduction of a Resale Royalty notes that the art auction market appears to have been unaffected by the introduction of a "buyerís premium".  Such a contention is made without any attempt to contextualise the introduction of a "buyerís premium".  The ability of the auction market to perform well in the face of the imposition of a buyersí premium was due largely to its introduction during a strong growth phase in the art market when the weight of "good news" far outweighed the weight of "bad news".  

The art market is currently in the mature phase of its growth period.  Some people now believe that it is experiencing "irrational exuberance" which has afflicted the share market and the housing market in recent times.  It is possible for the art market to be facing price deflation similar to that being experienced by world share markets and predicted by some for the housing market.  At best we can probably expect a plateauing of the art market with the possibility of a volatile fall in prices if the industry experiences a series of unexpected external shocks (and one of those could be the introduction of a Resale Royalty).  In the foreseeable future, it is difficult to see anything but a negative impact of the Resale Royalty on the art market in its current mature phase.  It may be difficult to predict its effect in the long run; but then, in Keynesí famous turn of phrase, "in the long run we are all dead".
 

 Treatment of Sellers of Art Works
The treatment of sellers of art worker is particularly unfair when compared with the sellers of other asset classes.  No reasonable argument is offered for this unfair treatment except that it would be beneficial to artists!  The proposed resale royalty will be without consideration of the following:

* holding costs incurred by the owner (restoration expenses, framing, insurance)
* capital gains through inflation (the resale royalty scheme amounts to the charging of a double capital gains tax as compared to other asset classes which incur only a single capital gains tax)
* no offsetting for deterioration of value (many art works which are sold should be considered consumable items rather than capital items as these items are sold for less than the original purchase price particularly when this is adjusted for inflation).

Disclosure of Confidential Commercial Material
The institution of a Resale Royalty scheme would involve the disclosure of sensitive commercial information to a yet unnamed bureaucratic institution.  The extent of this disclosure is much deeper than that required by the Taxation Department which only requires aggregated financial information in order to comply with taxation laws.  The Resale Royalty scheme will involve the feeding of particular information to the overseeing authority so that royalty on particular sales can be distributed to artists.  The  Queensland Branch views this possibility with concern as no guarantees have been offered as to the availability of this confidential private material.  
 
 

Conclusion.

The art market is volatile and can be fragile.   The introduction of a Resale Royalty would fail to provide the necessary safety net of a "superannuation scheme" and would almost certainly impact negatively on the incomes of younger artists.

The Queensland Branch of the ACGA believes that the introduction of a Resale Royalty scheme would be deleterious to the industry as a whole and that a Resale Royalty will impose costs and charges on the retail segment of the industry which can ill afford to carry such costs and charges.  As well, the scheme is particularly unfair to the owners of art works on whom the industry depends for ongoing sales of works.  The unfair treatment of this group of people (who have little opportunity to organise and oppose the scheme) is likely to result in many defecting to other markets where they can buy assets which are equitably treated with other asset classes. We are also concerned about possible breaches of confidentiality.

We believe that the national body of the ACGA should resist the introduction of a Resale Royalty scheme with as much vigour as possible.