Do artists today respond to financial incentives? The answer, my friend, is blowin’ in the tax code

Yesterday's post about Beethoven ended with a quote from him: "an artist has to be to a certain extent a businessman as well." 

The author of the article I quoted added "True then, true today."" It seems like some artists are businessmen now.

See Bob Dylan’s Catalog Sale Highlights a Tax Advantage for Songwriters: Both the rock icon and the company buying his song rights could enjoy benefits by Richard Rubin and Laura Saunders of The WSJ. Excerpts:

"The answer, my friend, is blowin’ in the tax code.

The sale of Bob Dylan’s songwriting catalog to Universal Music Publishing Group, announced this week, likely means he is trading an ongoing income stream for a lump sum now. The price hasn’t been revealed but is said to be between $300 million and $400 million.

Mr. Dylan’s sale is the latest and largest of a spate of similar deals this year that come with significant tax benefits both for the songwriters selling the rights and for the companies buying them, and those incentives are encouraging transactions.

“Many of these deals are not tax-driven, but some have a significant tax flavor,” says Alan Epstein, who chairs the entertainment and media group at law firm Venable LLP’s Los Angeles office.

There are, for sure, important nontax reasons for artists to cash in when they may have been reluctant before. Concert revenue has dropped sharply during the pandemic and prices for music rights are rising, now at 10 to 20 times the annual royalties.

Spokesmen for Mr. Dylan and Universal, which is controlled by Vivendi SA, declined to comment.

For musicians, a key advantage is that they can sell self-created works and owe capital-gains tax rates of 20% on the sale. That’s instead of owing ordinary tax rates of up to 37% each year on the royalty income they get from streaming, licensing and other uses of their works.

The lower capital-gains rate isn’t available to painters, filmmakers or videogame developers, who pay ordinary income-tax rates on sales as well as royalties.

The advantage exists because in 2006, senators and congressmen heeded the call of the country-music industry and created a special provision for songwriters. Then- Sen. Orrin Hatch (R., Utah), a Finance Committee member and published songwriter, also advocated for the change.

In addition, the 3.8% tax that applies to most capital gains and other passive income of higher earners likely doesn’t apply here because the songwriters are active participants in the business, according to Mr. Epstein.

For those thinking ’bout the government, timing matters, too. The favorable provision for songwriters may not last forever and neither may today’s capital-gains tax rates.

With a Democrat in the White House for the next four years, tax rates are likely heading up or staying flat. President-elect Joe Biden has proposed raising the top tax rate to 39.6% and taxing capital gains at ordinary-income rates for people earning more than $1 million annually. His ability to turn those ideas into law will be limited unless Democrats win control of the Senate in Georgia’s runoffs Jan. 5, but anyone who wants to lock in the Trump-era rates with certainty needs to act in 2020."

"Individuals and U.S. investors in funds buying catalogs typically have a 37% top tax rate and largely nondeductible state taxes, but corporate buyers have a 21% income-tax rate with deductible state taxes. That means an income stream could be worth more to a corporation on an after-tax basis than to an individual."