Imagine you are an artist, and you sell a painting to someone for $10,000. Ten years later, your popularity has spiked and that someone sells your painting at auction for $1 million. The price appreciation is great for the collector, but under current U.S. law, it's not so great for the artist — he or she receives none of the proceeds from the resale. Now two Democratic congressmen, House representative Jerry Nadler of New York's 8th District and Senator Herb Kohl from Wisconsin, are trying to change that.

The pair introduced a bill in Congress last week that would guarantee an artists' right to resale royalties — or droit de suite, to use the French term — for visual artwork bought on the secondary market. This law already exists in Europe, where it will expand even further in 2012, and it's already (a much-flouted) state law in California. But certain artists and their advocates would like to see it go federal in the U.S. One major difference between the new proposed legislation and the other models is that the Nadler-Kohl bill would restrict royalties to works bought at public auctions through houses that bring in revenue over $25 million per year — only big fish like Christie's, Sotheby's, Phillips de Pury, Heritage, and Bonhams, in other words. Secondary-market sales through galleries, dealers, and online auction sites like ebay are all exempt, as are auction house private sales. Those restrictions aside, the bill proposes an exorbitantly expensive royalty — a full seven percent tax — that is far higher than its European counterpart, and is likely to forever change the secondary-market landscape in the U.S. if passed.

On the surface, the Nadler-Kohl bill seems rational — it's a populist response to the corporate behemoths that rule the art world and give collectors in the 1 percent a platform on which to throw millions of dollars back and forth between one another. But the problem is that it goes too far and is likely to backfire. The tax is substantial enough to cause the auction houses to change their business model rather than pay it, and in the end it would serve to either line the pockets of the establishment while punishing struggling artists, or push even more of the auction market to Hong Kong. ARTINFO studied the text of the proposed legislation and pulled out five things you need to know about it and its consequences.

IT WILL DRIVE THE MARKET TO MORE PRIVATE SALES

The exclusion of private sellers from the bill is an attempt to circumvent one of the major arguments against droit de suite in Europe, which is that it disproportionately affects smaller galleries and dealers because they are ill-equipped to shoulder the administrative costs of paying the royalties and tracking artists down — unlike the major auction houses. The problem is, the biggest sales done in the art world often happen in the back room. The rumored top three art sales in history ("rumored" because private sales don't need to be disclosed) are Jackson Pollock's "No. 5, 1948," which was sold privately by music executive David Geffen through Sotheby's for $140 million to an anonymous buyer in 2006; Willem de Kooning's "Woman III," which was sold (again) by Geffen to hedge fund giant Steve Cohen through megadealer Larry Gagosian for $137.5 million in 2006; and Gustav Klimt's "Portrait of Adele Bloch-Bauer I," which was sold privately through Christie's by Maria Altmann to cosmetics magnate Ronald Lauder for $135 million in 2006.

While the thrill of the packed auction room certainly boosts hammer prices for Christie's and Sotheby's, it's clear that they can also pull in impressive sums privately. A massive tax is likely to push even more big-ticket items behind the curtain of private sales, or into the hands of secretive dealers like Gagosian who have an interest in keeping quiet about who's buying, who's selling, and what prices are like at the top end of the market. 

IT'S NOT A SLIDING SCALE

One of the craziest things about this bill is that it institutes a flat tax on the auction houses — the rate is seven percent whether a work sells for $10,000 or $10 million. In Europe, droit de suite is determined by a sliding scale, much like buyer's premiums at auction houses. For work sold for more than €1,000 and less than €50,000 the royalty is four percent, but as the price goes higher the percentage charged for the royalty goes down. At the low end, sellers of works that reach prices of more than €500,000 ($651,000) are only taxed .25 percent. Assuming prices are always in dollars to avoid exchange rate confusion, the auction house that, say, sold a painting for $1 million in London or Paris would be responsible for a few thousand dollars in European droit de suite taxes. Under this proposed legislation, if Christie's or Sotheby's in New York sold a painting for the same amount, the auction house would be responsible for $70,000 in taxes.

A difference of more than $50,000 in tax for selling a $1 million work of art in New York versus London is far more than enough to defray the cost of shipping the work to Europe for auction. As a result, New York's long-held dominance in the contemporary art auction market could be imperilled, with much of the inventory being shipped to London, or even better, Hong Kong, to be sold at their respective contemporary auctions.

COLLECTION AGENCIES WIN, ARTISTS LOSE

The essence of the bill is this: after an auction, the house has 90 days to pay a collection agency the royalty. That agency can then take up to 18 percent off the top for its own operating expenses. Half of what's left goes into an account that will be used to fund various art nonprofits. Then, and only then, does the artist get a cut — now down below 3 percent of the purchase price. For the minimum price of $10,000, the artist would get $287. 

The problem with this is that collectors buying in the primary market are going to expect to have to pay the full seven percent royalty if they resell a work. If they expect to get seven percent less back if they resell the work, they probably won't be willing to pay as high a price in the primary market, meaning that the artist would lose out on the first transaction. The vast majority of artists never see their work get resold at auction, so they only lose out on the first purchase of their work.

THE CAVEAT

The one caveat to all of this analysis is that it relies on basic economic theory, which has one major flaw: it assumes rationality. If you have ever been to a flashy contemporary art sale at one of the major auction houses, rational is the last word you would use to describe it. As art advisor Todd Levin told ARTINFO in regards to the European droit de suite question, "I get that the economists are looking at this strictly as a dollar-and-cents thing, but I don't think that the economists get how the collectors think."