I was amused by the editors of the Washington Post’s take on taxing Bob Dylan’s earnings from selling his catalogue:
BELATED HAPPY birthday to Bob Dylan! It’s hard to fathom that the skinny kid from Minnesota who revolutionized popular culture back in the 1960s became an 80-year-old man on Monday. In addition to longevity, Mr. Dylan has been blessed with a personal fortune measured in the hundreds of millions of dollars. It’s a reward that is both well earned, given his artistry, and ironic, given his beginnings as a penniless poet of social protest.
The unduly gentle taxation of some of Mr. Dylan’s winnings — and those of other wealthy veteran singer-songwriters — is no cause for celebration, however. In fact, it would make a pretty good subject for a present-day social-change anthem. Though not the most flagrant loophole in the tax code, it does epitomize a key issue: the gap between the top tax rate on long-term capital gains, 23.8 percent, and the top rate on “ordinary†— wage and salary — income, 37 percent. This differential treatment overwhelmingly benefits the rich, and the two biggest capital gains breaks alone cost the Treasury $211 billion in 2021, according to the Joint Committee on Taxation (JCT).
Here’s the story: In 2006, music industry lobbyists persuaded Congress to let artists pay the capital gains tax rate on earnings from selling the rights to collections of their musical compositions, instead of the ordinary income rate, as they had done previously. The latter made more sense: Writing songs is labor, not investing, but the lobbyists said change was needed to equalize artists’ tax rates and those of their record companies. In any case, the JCT considered the bill’s likely cost too small to estimate, and it passed.
I think their view is reasonable, mild even. Not only would I tax royalties at the same rate as any other income, I would limit the duration of copyrights to 15 years, non-renewable and non-transferable. IMO the status quo impedes innovation and does not satisfy the constitutional mandate.
“Writing songs is labor, not investing…”
Except no one may buy the song. As I’ve noted so many times, this is the mentality of a fee for service employee, not an owner interested in building equity. Lawyers, doctors, journalists, cashiers, consultants, tradesmen, sports or film or music entertainers, prostitutes………I could go on………have a W2 or 1099 mentality. They provide a product or service and get paid. If they don’t they have a cause of action against their employer. And they can get a divorce from same.
Owners, those building business or brand equity, anyone betting on value creation but risking loss or failure – that is, no or negative income, has an owners mentality. That’s the purpose of the difference in tax treatment.
W2 or 1099 people are reliant on equity builders, but always forget that. They may be very smart or talented. But they are offering only their time, brawn or talent – fee for service. They provide those services to those who have amassed capital. But there is no escaping they are risk averse time servers, with no capital involvement.
The demarcation can become grey, to be sure. But go after equity builders if you wish. You will kill the golden goose. The empirical evidence is in.
Composers, playwrights, poets, etc. don’t write to build equity but because they can and because they must. The risk for them is in not writing not in writing.
They are creating a brand and demand for their service out of thin air. That’s the point. It’s not like fulfilling the demand for haircuts or food.
I understand it can sometimes get into a problematic tweener area. And it can offend the sensibilities of some. A professional violinist at the CSO is plying a trade. A Mozart violin concerto was created. Dylan, or the Beatles, created a catalog. A small business owner who starts a plastic injection molder to make parts creates value.
The tax treatment isn’t a law of physics. It’s the practical and empirical recognition of the desirability of the action. As I said, there is a mentality associated with each.
Of course, we could probably approximate the motivational result with one low tax rate. But as an empirical fact we wont. Think about the history of the code since the 1910s.
I don’t object to Dylan or the Beatles profiting from their creations; I do object to the new owners of those creations profiting from them. Creating a brand or a catalog may or may not be worthwhile but I don’t think that subsidizing those creations is a legitimate function of government.
The Constitution is quite clear. The reason that Congress is given the power to grant copyrights and patents is “to promote the progress of science and useful arts” and only that. IP is not a fundamental right like freedom of speech of religion. It’s purely instrumental.
The physician invests in and builds his own office, buys his own computers, hires his own staff. Sometimes you do that out of your own capital and sometimes you borrow or do both. Why doesnt he get spatial gains rates? He is at risk. Why not every independent carpenter? He has to buy all of his equipment, build or buy a shop, etc. He is at risk. Why not capital gains rates?
“It’s not like fulfilling the demand for haircuts or food.”
Farmers require lots of capital. Again they may borrow, use their own amassed capital or both. Why not capital gains rates for them?
Steve