The Wall Street Journal - 11.09.2019

R8| Wednesday, September 11, 2019 THE WALL STREET JOURNAL.

JOURNAL REPORT | WEALTH MANAGEMENT

average income and the donation amounts vary

across school district.

We showed people either the contributions

to the PTA from each district (hidden condition)

or both the contributions and the average in-

come of each district (revealed condition) and

asked which district they believed should be re-

sponsible for an additional tax that helps all

schools across districts. People levied additional

taxes on mostly poorer school districts when in-

comes were unknown, but targeted wealthier

districts when incomes were revealed.

What can we learn from these results? It

can be convenient to point a finger at per-

ceived culprits: people seemingly not contrib-

uting enough, or taking advantage of social

programs. But as people decide who should

contribute more (in taxes) and who should re-

ceive more (in benefits), they often lack accu-

rate information. That means that disagree-

ments about the correct course of action can

be based on flawed premises.

Second, when it comes to individual finan-

cial decisions like supporting higher taxes or

donating to charity, knowledge about the true

state of affairs—the wider gap in income and

wealth between the rich and poor than people

believe—could change people’s willingness to

support more funding for social programs or

increased donations to charitable causes.

A common reaction to our results is that

such radical transparency of income and

wealth would be at best infeasible and at

worst lead to societal upheaval. Yet one coun-

try provides a glimpse into how it could work.

Norway has an open database that allows citi-

zens to see fellow citizens’ income and the

taxes they paid. What is the effect? Not only is

citizens’ compliance with paying their taxes

high despite relatively high rates of taxation—

but Norway has also not experienced revolu-

tion as a result.

Dr. Hauser is a senior lecturer

in economics at the University

of Exeter Business School.

Dr. Norton is a professor of

business administration at

Harvard Business School. You can

reach them at [email protected].

People who inherit artwork, or donate

a piece to a museum or other nonprofit

face a common goal: Don’t run afoul of

the Internal Revenue Service.

Easier said than done, unfortunately.

Because without a purchase price to

guide them, tax filers can find them-

selves embroiled in a debate with the

IRS about the value of inherited or do-

nated work.

So how can taxpayers avoid that

costly debate? While there’s no guaran-

teed path, lawyers and art experts say

there are a few things taxpayers should

know about reporting the value of art

to the IRS:

• When donating art worth $5,000 or
  more, tax filers must hire an appraiser
  to value the pieces and attach the ap-
  praiser’s name to their returns. If pieces
  are valued at $20,000 or more, the ap-
  praisal itself must be attached.


• For inherited pieces, an appraisal
  must be included with the estate-tax re-
  turn if the work or collection is valued
  at more than $3,000.


• To get the most accurate estimate of
  artwork, tax filers should hire an ap-
  praiser experienced in valuing the spe-
  cific pieces in question, whether they be
  paintings, drawings, prints, textiles, rare
  manuscripts, antiquities or any other
  category of art. The appraisal should in-
  clude multiple high-resolution images of
  the pieces, which will be needed if the
  IRS decides to take a closer look. The
  cost of an appraisal generally ranges
  from $150 to $600 an hour, according to
  Alex J. Rosenberg, a Manhattan-based
  appraiser and past president of the
  American Society of Appraisers.


• If donated or inherited art is esti-
  mated to be valued at $50,000 or more, GIACOMO BAGNARA; BARB DORSEY

the tax filer’s appraisal will get an auto-

matic review by a group of IRS apprais-

ers known as the Art Appraisal Ser-

vices. Sometimes appraisals—for

instance, those involving objects about

which there may be questions regarding

authenticity, condition or some other

complicating variable—are forwarded

for additional review to the IRS Com-

missioner’s Art Advisory Panel, a group

of 16 or 17 outside art and antique deal-

ers, museum curators, scholars and art

advisers. The panel’s recommendations

go back to the Art Appraisal Services

and are included in the IRS’s determina-

tion of what the taxpayer may owe.

• If either the Art Appraisal Services or
  the Art Advisory Panel find that valua-
  tions have been under- or overstated,
  the taxpayer may be subject to addi-
  tional tax liability, interest on that
  amount and possible penalties. Accord-
  ing to the IRS, 55% to 65% of the valua-
  tions submitted annually to the Art Ad-
  visory Panel result in adjustments.


• Taxpayers and appraisers determine
  valuation based on the fair market
  value of an object as of a certain day—
  for instance, when the owner dies or
  when it is donated to a museum. The
  Art Appraisal Services unit and the Art
  Advisory Panel, however, may use com-
  parable sales information beyond that
  date.Thatcanbeuptoayearormore
  later to determine value. (The groups’
  assessments of appraisals usually take
  place three or four years after filings
  are submitted).


• For taxpayers who want to dispute
  the findings of either the Art Appraisal
  Services or the Art Advisory Panel,
  there is an appeals process and, finally,
  Tax Court.

Mr. Grant is a writer in Amherst,

Mass. Email: [email protected]

WHAT TO KNOW ABOUT PUTTING A

VALUE ON DONATED OR INHERITED ART

BYDANIELGRANT

were usually the lowest-income mem-

bers of the group—those who had

only four total units, and, therefore,

contributed 71% of their income to

the pool. And people who contributed

more than 20 units were typically the

highest-income members—those who

had 55 units, and, therefore, contrib-

uted just 37% of their income.

In another version of the experi-

ment, when participants were in-

formed of the full distribution of in-

come, they changed their behavior

dramatically: They punished the rich for not

contributing their “fair share” and actually re-

warded the poor for giving so much of the lit-

tle they had. (Importantly, our results were

similar when we made participants work to

earn their incomes.)

Of course, behavior in these stylized games

can tell us only so much about how these dy-

namics might play out with policy decisions. So,

in our final experiment, we used actual data

from donations to parent-teacher associations in

five New York school districts, where both the

H

ow much do people ac-

tually know about the

income and wealth of

people who live around

them? And how does

what they think they

know skew the way

they think about gov-

ernment taxes and spending?

Recent research we conducted suggests that

the answer to those two questions are: Not

much and a lot.

An emerging body of research suggests that

citizens’ preferences for spending on public

goods—from social programs to health care to

infrastructure—are based in part about who

they believe contributes and benefits. However,

we discovered that many people are unaware of

the true extent of inequality where they live.

And in some cases, their beliefs are dramatically

different than reality.

In our research, we assessed people’s be-

havior toward the rich and poor under two

conditions in a controlled experiment: when

inequality remains invisible (or hidden), and

when we reveal it. We then explored whether

people might view the behavior of lower-in-

come people differently when they were made

aware of just how little income being “low in-

come” entailed.

In other words, I might be angry that poor

people contribute very little in income tax to

the overall federal budget. But I might feel dif-

ferently when I realize that they have so little

that any contribution represents a large per-

centage of their small income.

In our experiments, people played a 10-

round game in groups of five, in which every

person was randomly assigned an “income.” In

each round, every participant then chose how

much of their income to contrib-

ute to a common pool. All contri-

butions were then doubled and di-

vided equally (or “redistributed”)

among the five players.

We assigned “incomes” to be

reflective of the U.S. income dis-

tribution: The richest person re-

ceived 55% of all income (or 55

“units” of income), the next 19%,

the next 13%, the next 9%, and the

poorest 4% (just four units).

In one condition of the experi-

ment, we showed people the amount contrib-

uted by each person in their group, but not the

distribution of income. We then let each per-

son reward or punish each other by sending

units to someone or taking units away from

them, respectively, based on what they gave.

People directed their punishment toward the

person who contributed less than three units,

and their reward at the person who gave more

than 20 units.

What the participants didn’t know was that

people who contributed less than three units

Thy Neighbor’s Income

When people better understand the

wealth inequality in their communities,

it changes the way they think about

government taxes and spending

BYOLIVERHAUSER ANDMICHAELNORTON

Many

people are

unaware

of the true

extent of

inequality

where

they live.

After studying business in college and working

a number of jobs after graduation, Jesse Veek

decided office life wasn’t for him. So, two years

ago, he decided to try his hand at farming,

growing crops on 2 acres in Edgerton, Wis.,

that he leases for $175 a year, per acre.

Upbeet Produce, his community-supported-

agriculture (CSA) farm, generates most of its

revenue from subscribers, who pay for deliver-

ies of vegetables and fruit from June through

October. The most popular plans are $240 for

biweekly and $415 for

weekly deliveries.

In its first year, the

farm grossed roughly

$11,000 in sales. This

year, Mr. Veek antici-

pates $16,000 in sales

and hopes to break

even. He’s confident

that his 2 acres are ca-

pable of producing

$40,000 worth of crops

annually.

“As I get further past

the learning curve,” he

says, “I’m able to spend

more time on things that

are more profitable.”

Mr. Veek files his

taxes as a sole propri-

etor, and says his personal and professional ex-

penses often overlap. He makes deliveries, for

example, in his 2003, paid-off Toyota Corolla.

His monthly expenses include $175 for gas,

$200 for groceries, $160 for health insurance,

$25 for car insurance, $20 for Netflix and Spo-

tify and $75 for “entertainment,” which in-

cludes dining out. Mr. Veek lives rent free in

the farmhouse on the land he leases in ex-

change for keeping up the property. He spends

about $120 on utilities, and $50 for his phone.

The farmer has spent $3,000 from savings

and cashed out $4,000 in stock since starting

the business. He has about $1,500 left in stock,

$5,000 in 401(k)s and a whole life insurance

policy with a $2,000 cash value. His only debt:

$1,800 in student loans, which are in deferment.

Mr. Veek wants to grow his business, plan for

retirement and one day start a family.

ADVICE FROM A PRO:Nate Kublank, a certified

financial planner at Aspiriant in Milwaukee, ap-

plauds Mr. Veek’s ability to live on a shoestring

budget while pursuing his passion.

He says the next few years are going to be criti-

cal for Mr. Veek. Once he starts making money,

he should resist the urge to splurge and focus

on building up his sav-

ings—aiming for three to

six months of expenses

in an emergency ac-

count—and reinvesting

in his business.

Mr. Kublank advises

Mr. Veek to consult with

a local tax attorney who

has worked with farmers

to help him maximize

his tax deductions, and

start keeping his per-

sonal and professional

expenses separate. He

also should review

whether there are tax

implications to living

rent-free in exchange for

property maintenance.

If he starts to increase his sales and generate

profits, “he’s going to want to make sure his re-

cords for income and expenses related to the

business are very tight,” Mr. Kublank says.

While Mr. Veek’s income is low, it would be a

good time to roll his 401(k)s into an IRA, and

then convert it to a Roth IRA so he can make

withdrawals tax-free in retirement, Mr. Kublank

says. Mr. Veek also should consider selling his

stock and cashing out the insurance policy to

pay off his student loans if the tax ramifications

are minimal. The remaining money could be put

into the business.

Mr. Kornelisis a writer in Seattle. He can be

reached [email protected].

THE GAME PLAN

ASmallFarmerLooksAhead

An adviser recommends that Jesse Veek

separate his personal and farming expenses.

BY CHRIS KORNELIS