The Risk of Tax Avoidance through Charitable Donations in the U.S. Art Market

Provided in a variety of galleries, local and national museums, art is something that everyone can appreciate. Access to art through these places provides the opportunity for cultural, social and historical enrichment, functioning as an invaluable addition to the academic growth of both individuals and communities; however art is also big money. The fine arts market is one of the most poorly regulated markets in the world, allowing for extensive collusion on prices and sales which ensures that the market prices of art do not decreases. This exclusivity and collusive behavior results in pieces of art that are worth fortunes. So why would anyone willing donate art worth hundreds of thousands if not millions of dollars? Rather than solely out of altruistic motivation individuals also engage in philanthropic activity due to financial incentives found within the U.S. tax code. Using a variety of economic and journalistic sources, we explore the structure of the fine arts market, paying close attention to the pricing practices and relevant U.S. tax code to open the discussion on the value of donated art and provide possible policy changes. The current structure provided through the U.S. tax code fails to address the constant increase of values seen in art and does not provide strict enough guide lines for museum donation criteria. Policies should be implemented that aim to mitigate excessive tax avoidance through the exploitation of charitable donations. This is an edited version (2020) of the original 2018 edition of this paper which corrects typos, an arithmetic error, and clarifies content in the section “Scenarios of Charitable Donation Tax Law.” The paper is otherwise unchanged