Taxing Creativity

Professor Jeff MaineBy Professor Jeffrey Maine

I love country music. Especially old country music…from the ’70s!

So you can imagine how intrigued I was 15 years ago when the powerful country music industry, on behalf of its songwriters, successfully lobbied Congress for a special tax break. Basically, songwriters get to enjoy the benefit of a low “capital gains” tax rate on gains from sales of their songs. Unfortunately, other creators (such as artists, authors, and many inventors) have to pay a higher tax rate when they sell their creative works. And we laborers, who work Dolly Parton’s “9 to 5,” have to pay a higher tax rate on our wage income.

At the time, I wasn’t too bothered by the odd tax break for songwriters. Perhaps it was because of my love of country music. Maybe it was because I’ve learned over the years not get too bothered by quirky tax legislation in response to assiduous lobbying efforts by various groups. Maybe I had accepted the “stated” policy rationale for the rule – to remove perceived tax inequity facing songwriters. At any rate, the stakes seemed to be quite small.  And, as Kenny Rogers sang in his 1978 hit “The Gambler,” you have to “know when to fold ‘em, and know when to walk away.”

But now, 15 years later, the rule is bothering me. A lot.

In early December 2020, in the midst of the worst pandemic in 100 years, and just 6 months after the brutal killing of George Floyd, the world learned that Bob Dylan sold his 600-song catalog to Big Corporation for a whopping $300 million – an unprecedented sum for a songwriter. And he wasn’t alone. News spread of other songwriters – Neil Young, Stevie Nicks, Mick Fleetwood – who also decided to sell off their rights in their music holdings. News also spread quickly of the special tax treatment accorded to their gains…because of that quirky rule for songwriters enacted 15 years earlier.  Indeed, last December, a Forbes article talking about Bob Dylan’s song catalog sale quoted one of my law review articles that described Dylan’s tax break.

Country Music

The Songwriters Capital Gains Tax Equity Act of 2005 was sponsored by 38 members of Congress, primarily from southern states. The Nashville Songwriters’ Association International (NSAI) spent five years lobbying Congress for passage of legislation. By one estimate, NSAI and songwriters made 400 visits to D.C., all part of the well-coordinated effort to narrate the songwriters’ story and expose the alleged inequity of tax treatments between songwriters and wage earners and songwriters and publishers. Congress bought into the narrative:  It was fair to give songwriters a tax break because their average income is quite low and often comes in spurts.  And it was fair to put them on equal footing with publishing companies, which are generally entitled to capital gains treatment.

It seems we all were sold, in the words of George Straight, “some ocean front property in Arizona.”

The special tax break for songwriters violates several fundamental principles of taxation:

  1. Tax rules governing gains from creative activity should embrace the principle of fairness. In other words, persons who are similarly situated should be taxed in a similar fashion. While one could argue that no two taxpayers will be situated equally, I believe songwriters are very similar to other creators – authors, painters, photographers, sculptors, inventors, Indie developers of video games, app developers for Google, to name a few. Besides, if our intellectual property system views patents and copyrights similarly, then tax rules designed to support that system should also treat them similarly.
  2. The design of tax rules sometimes involves tradeoffs between fairness and other tax policy goals, such as efficiency or neutrality (i.e., the tax system should avoid unnecessarily shaping economic behavior). No one has made the case, however, that it is efficient to tax songwriters at a lower rate than other creators with equal income in order to maximize songwriting activity even though such an approach violates equity.
  3. An ideal tax system should provide certainty. Unfortunately, by creating tax distinctions across creative activity and taxpayers’ characteristics, Congress has added complexity to the tax system. The special distinction for musical copyrights does not promote fairness or other important policy goals. Eliminating it altogether would go toward achieving another goal – tax simplification.
  4. The tax system is “race neutral” on its face.  But many of its rules have a systemic racist element to them – they worsen longstanding racial inequities and perpetuate white advantage and black disadvantage.  It is difficult to understand the racial impact of the capital gains tax break for songwriters. But it is likely the special tax break represents yet another tax rule subsidizing creation of white wealth.  Though the Songwriters Capital Gains Equity Tax Act of 2005 benefits all songwriters, the reality for black songwriters is different from their white counterparts.  We’ve seen black songwriters barely make a dime off their creative work, while white musicians find radio airtime, fame, and money using the exact same song. We’ve seen the music industry leveraging business structure and copyright law to deprive black songwriters of benefits that should have flowed to them.  We’ve seen white musicians who retained ownership of their songs, but black songwriters who haven’t enjoyed the same privilege.  Recently announced was the creation of Black Music Action Coalition, a group of songwriters and others to call on the music industry to make things right for black artists!

Bob Dylan was right:  “The Times They Are A-Changin’.”  The law must encourage creativity from all creators. Carving a tax exception for one group of creators perpetuates tax and racial inequities in the Code.  It is time to eliminate tax exceptionalism for musical compositions or expand its scope to cover a broader classification of creative property.

These and other thoughts are reflected in a forthcoming article, entitled “Taxing Creativity,” 89 Tennessee Law Review ___ (forthcoming 2022) (with Professor Xuan-Thao Nguyen). I would welcome any thoughts you might have.