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The Impact of an Australian Resale Royaltyon Eligible Visual Artistsaccurately described as a series of sub-markets, with many artists and dealers in a highlydecentralised primary market, and a more concentrated secondary market. 9Market structure varies between these levels. At the lowest level, competition iswidespread. Universally there are more artists and would-be artists than thereare buyers interested in acquiring their work, so prices are low…the secondarymarket is considerably more concentrated on both buying and selling sides. Onlya relatively small proportion of artists make the transition from the primarymarket, so that in any one center there is only a restricted number of artistsrepresented in the market at any one time. Given the resources required to enterthe market on the buying side and the somewhat arcane nature of the product,the number of buyers, both individual and institutional, is similarly constrained.Considerable market power can be exercised by the galleries and dealers whohandle most of the sales in this market…over time, galleries and dealers whohandle the most successful artists and buyers from other allegiances to theirstable; such key players in the market can exert a powerful influence on the riseand fall of artists’ reputations, and hence on the future price expectations for theirwork.The existence of market power in the secondary market suggests that demand for art sold inthe secondary market may be relatively inelastic compared with the average product sold onthe primary market.3.4 ELASTICITIES ASSUMED IN THE MODELLINGIdeally, we would like to know with certainty the value of these demand elasticities to informour modelling.However, as previously indicated there is a paucity of empirical evidence about own-priceelasticities of demand (and supply) for art beyond conjecture of the sort presented above.Given this uncertainty and the range of qualitative views as to what the elasticities are, wehave presented results assuming both the cases of:perfectly elastic final purchaser demand, where the economic incidence of the RRRwould be borne by the dealer or artist;perfectly inelastic final purchaser demand, where the full economic incidence of theRRR would be borne by the purchaser; andunitary final purchaser demand elasticity (a one per cent increase in price results in aone per cent decrease in demand). In this case, the economic incidence is sharedbetween the purchaser, and the dealer and/or artist combined.3.5 TRANSITION PERIODWhen an RRR is introduced, an implementation issue is the extent to which any transitionperiod or ‘grandfathering’ occurs. There are precedents for grandfathering assets (such as9 Throsby, D., (1994) The Production and Consumption of the arts: A view of Cultural Economics, Journal ofEconomic Literature, Vol. 32, No. 1 (Mar 1994), 1-29.13
The Impact of an Australian Resale Royaltyon Eligible Visual Artiststhe capital gains tax exemption on assets purchased before 1985). However, there are otherexamples (such as the GST) where there was only limited grandfathering.We note that, to the extent the RRR is not known (or ‘anticipated’) at the time of the primarysale, and applies to stock that has already passed through a primary sale (and been paidfor), the economic incidence of the RRR on these existing works will be borne by either thedealer or purchaser (and not the artist) – unless the introduction of the RRR prevents thesale of the product (in which case the artist might still have to lower the RRR-inclusive priceand therefore accept some of the burden). This could be regarded as delivering on thepolicy intention to the extent there is no prospect of the cost being directly ‘passed back’ tothe artist concerned. Similarly, if grandfathering of existing stocks were implemented, allholders would receive a windfall gain, to the extent the price of these artworks rises in linewith those artworks subsequently subject to the RRR.Consistent with the Australian Government modelling, we have assumed that the RRRapplies to the full stock of artworks, based on the annual AASD data.We note, however, potential objections to which such draconian retrospectivity would giverise. It would be akin to applying capital gains tax to all pre-September 1985 assetacquisitions. This constitutes a major practical blockage for implementing any RRR on thisbasis.3.6 AVOIDANCE OPPORTUNITIESParticularly at high rates of royalty, or for artworks of particularly high value, there may be anincentive to ‘forum shop’ (and, if the artists themselves are so minded, ‘forum supply’) toavoid payment of the RRR. The potential for avoidance within Australia will be reduced if theRRR is applied comprehensively to all public sales (auction houses and commercialgalleries). Even then, there will be an increased incentive to deal via private sales.A relatively low royalty rate reduces the incentive to conduct sales in another jurisdiction,which may come at an additional cost. Similarly, the existence of RRR systems in Europeand other comparable jurisdictions decreases avenues for avoidance. But only if the sameRRR system applied throughout the world, with full reciprocal recognition arrangements, willthis problem be completely eliminated.For the purposes of our modelling we have assumed that an RRR system can beappropriately policed to prevent large scale avoidance. This would include ensuring thatthere are adequate record keeping, auditing and reporting requirements in place.We make this as an assumption. We do not know whether it is a realistic assumption.As with almost any system of this kind, there is likely to be some avoidance. To the extentthere is avoidance activity, our results will be an overestimate of likely net benefits to eligiblevisual artists.14
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evaluating the impact of an australian resale ... - Office for the Arts

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