Uncle Sam Is Sheltering the SWAG Economy

Silver, wine, art, and gold are scarce, transportable, and long-lasting physical assets that make handy tax shelters.

By Sam Pizzigati

The wealthiest Americans — and deep pockets everywhere else — are spending epic sums on artwork.

Christie's and Sotheby's, the two big fine art auction houses, are reporting a 35-percent increase in the prices paid for Picassos and other blue-chippers over the past 12 months. The Artprice Global Index, a broader tally of the prices works of fine art are fetching, has art values up 120 percent over the last decade.

What's driving the new uber-rich passion for fine art?

"International high-net-worth individuals are looking for somewhere to put their money besides the anemic stock market," Michael Plummer and Jeff Rabin, the two principals behind the midtown Manhattan-based Artvest Partners LLC, recently wrote.

Fine art isn't the only kind of asset to benefit from this yearning for larger and safer returns. Dollars, euros, and British pounds are also flowing to other "hard" assets that share the attractions that fine art offers. Silver, wine, and gold have all been ratcheting up steadily over recent years. And now Investment Week's Joe Roseman has coined a catchy handle for this trend:

"Everyone," Roseman advises his well-heeled readers, "needs some SWAG."

The four elements of SWAG — silver, wine, art, and gold — have "all appreciated quite sharply" over the past decade, notes Roseman, despite "two global recessions, a severe global banking crisis, a credit crunch, and (generally speaking) highly volatile and mostly negative equity market performance."

Fine wines, the Liv-Ex wine index shows, have jumped about 300 percent since 2000. Gold and silver have appreciated at an even higher rate. Standard & Poor's 500 stock index, by contrast, rose just 0.04 percent in 2011, returning only 2.1 percent with stock dividends included.

The SWAG elements have plenty in common. Silver, wine, art, and gold all rate as scarce, transportable, and long-lasting physical assets. They also make handy tax shelters. They generate no income and, consequently, create no annual tax liability for wealthy investors.

The profits SWAG assets generate at sale, meanwhile, count as capital gains and receive preferential tax treatment over ordinary income.

These tax benefits from SWAG ought to create obvious concerns for the rest of us. The less the 1 percent pays in taxes, after all, the greater the tax burden on the 99 percent.

But our concern ought to go deeper than the tax games the swaggering rich can play with SWAG assets. SWAG just may symbolize the ultimate folly — and sheer irrationality — of our staggeringly unequal, top-heavy economy.

In today's troubled economic times, we desperately need investments in products and services that translate into jobs and paychecks. We need to replace our crumbling infrastructure, develop sustainable new energy technologies, and patch our frayed safety net.

The last thing we need? Billions of valuable dollars worth of art hanging on the walls of mansions, or thousands of bottles of wine aging in high-tech cellars and squirreled away in safes. But in a deeply unequal United States, where wealth remains concentrated in a precious few pockets, that's exactly what we have.

Many of those dollars pouring into SWAG today would have gone yesterday to Uncle Sam. In the middle decades of the 20th century, America's wealthiest faced income tax rates that reached over 90 percent on income that topped $400,000 per year.

In that high-tax-on-high-income environment, wealthy Americans routinely plowed their wealth into tax-free municipal bonds. In the 1950s, for instance, the widow of automaker Horace Dodge invested her entire $56-million legacy from the Dodge auto fortune in munis.

Those bonds paid only 3 percent in interest. But the investment paid off handsomely for the mid-century's 99 percent. Those dollars financed the schools and sewage plants and waterworks that created the foundation for the classic American middle class.

Back then, America's deepest pockets could pick up works of art for a song. In 1960, banker David Rockefeller only had to shell out $8,500 for painter Mark Rothko's "White Center." In today's SWAG world, "White Center" now carries a $73 million price-tag.