So Australia is about to have reach-through royalties on artistic work. Basically, if you have a piece of art and manage to get more than $1,000 for it, then on re-sale, the buyer has to pay the original artist 5% of the subsequent sales price. The news discussion is all about helping indigenous artists. But I must admit that my first reaction is that this could hardly help. This might be resolved in background documentation but how this gets administered and deals with international sales seems really challenging.
But even if it can be resolved, is it a good idea. If I paint a painting and could sell it previously for $2,000 what will I be able to sell it for now. Imagine first that it doesn’t change in value over time. Then the future potential purchasers of the painting will only pay $2000 overall, including the royalty. So the painting’s value to my buyer today will be $1904.76. I’ll get that money today and the rest of the $2,000 when it is re-sold. That might seem like a worse deal but so long as the buyer and I face the same rate of discount we will adjust the asset value for that too.
What if it is expected to appreciate? Now so long as the buyer and I have the same degree of risk aversion (which is doubtful if I am currently starving) then the same neutrality will hold. The expected net present value of my sale with and without re-sale royalties is the same.
But now what if my buyer is going to do things that will actually increase the painting’s value? For instance, display it in a prominent space, take it on exhibition, etc. In this case, their return from that activity has been reduced by the required royalty. That means a lower overall return for me too.
I wouldn’t agree to that sort of thing and that is probably why we don’t see re-sale royalties freely agreed to (that is, there is nothing stopping them being agreed to now). Making it compulsory surely will not help anyone. Hopefully, there is provision for opting out and so we have only changed the default by this action.