Paul L. Caron

Thursday, July 25, 2019

Financial Innovation, Tax Law, And The Making Of The Contemporary Art Market

Michael W. Maizels (Harvard metaLAB) & William E. Foster (Arkansas), The Gallerist’s Gambit: Financial Innovation, Tax Law, and the Making of the Contemporary Art Market, 42 Colum. J.L. & Arts 479 (2019):

This essay presents an account of an important moment in the emergence of the market for Pop art that was facilitated in part by a distinctly accommodating legal environment. Although Abstract Expressionism is commonly credited with causing American art’s ascendance onto the world stage immediately after World War II, its international acclaim belied a precarious institutional and financial infrastructure for living American painters. It was only with the following generation of Pop and Minimalist artists that the United States developed a self-sustaining market for the work of contemporary American artists. A significant but largely overlooked factor in that continued success was the ability of art dealers to take advantage of the unique legal and regulatory environment of the 1960s. This essay focuses on the efforts of an enterprising art gallerist, Leo Castelli, to aggressively promote his stable of Pop artists through the development of several financial structures, including some designed to leverage the relatively generous income tax deductions and anemic enforcement regime of the time. In doing so, Castelli not only seeded the ground for the international ascendance of American visual art, but also engineered financial arrangements that fostered the development of a lucrative and resilient art market that endures to this day.

With the aim to provide insights into both the legal-political and the art historical registers, this essay describes a tax law framework that provides a key piece missing from the art historical puzzle. While historians have treated the explosion of the market for American contemporary art as a natural consequence of postwar American economic ascendance, insufficient attention has been paid to how this economic energy was channeled into the art market in the first place. Stated differently, Americans were newly flush with cash, but why did they start buying art with it?

To answer this question, Part I of this essay examines how Castelli engineered an array of new financial mechanisms designed to drive up the value of living artists’ work through branding, controlling markets, and streamlining supply from his stable of artists. Part II then describes the tax regime during the emergence of American Pop Art, and details how the potential for significant charitable contribution deductions provided an incentive for art purchasers, appraisers, and dealers, including Castelli, to overvalue works of art in order to lower tax liabilities. Part III provides examples of notable transactions detailed in Castelli’s archives, and Part IV reviews the lasting impact of Castelli’s innovations on the American art market and the enduring law and policy considerations raised by Castelli’s business model.

For art historians, a look into the underpinnings of Castelli’s gallery reveals a financial imperative for producing multiples, a signature Pop modality. Art historians have typically emphasized how Jasper Johns and Andy Warhol used their art to make a statement about the reigning dogma of Abstract Expressionism. However, their art also provided an opportunity to benefit from the financial advantages generated by Castelli’s tactics.

For legal scholars, this case provides a striking example of the opportunities for manipulation that can arise when market conditions underlying tax policy assumptions change rapidly. It also highlights the tensions inherent in a tax regime that relies on providing incentives for wealthy individuals to support institutions that benefit the public at large. Castelli’s efforts illustrate the perhaps surprising intersections of law, the creative arts, and institutions that deal in artists’ works. To explain how Castelli became positioned to profoundly influence the direction of art production, we first describe the gallerist’s rise in the New York art world.

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