After Representative Alexandria Ocasio-Cortez raised the idea of a marginal tax rate of 70 percent on income over $10 million, the progressive wing of the Twittersphere began pointing out that in the 1950s and early 1960s , the top marginal tax rate was over 90 percent.
The progressives’ point was that, despite this seemingly onerous level of taxation, the 1950s were a golden age for the U.S. economy, and the rich did just fine, thank you very much. According to records compiled by the Tax Foundation, a single person making $16,000 in 1955 — that’s $150,000 in today’s dollars — had a marginal tax rate of 50 percent; compensation of $50,000 ($470,000 today) moved you into the 75 percent tax bracket; and an income of $200,000 ($1.9 million today) put you in the 91 percent tax bracket. (Married couples filing jointly hit the 91 percent mark at $400,000.) Which meant that the federal government took 91 cents of every dollar over $200,000. When you added it all up, someone in 1955 who made $1 million a year paid over $800,000 in taxes.
At least they did in theory. Myself, I had a hard time believing that wealthy people in the 1950s had a different attitude toward the taxman than wealthy people do today. And guess what? I was right. The rich and their well-paid accountants worked just as hard to lower their tax bills as the rich do today — harder, in fact, because failing to do so was incredibly costly. They bridled just as much at what they viewed as confiscatory taxes. And they found — or created — enough loopholes that, according to the Congressional Research Service, the top 0.01 percent in the 1950s paid not 90 percent but closer to 45 percent of their income in taxes.
Back then, the wealthiest people in the U.S. were not corporate executives or baseball players. (The latter group made so little they usually had to work during the off-season.) Rather, they were entertainers. In 1958, for instance, the chief executive of U.S. Steel, Roger Blough, made around $300,000. Frank Sinatra made closer to $4 million. (That’s $35 million in today’s dollars.) Sinatra, Bob Hope, Bing Crosby, Sammy Davis Jr., Joan Crawford, Henry Fonda, Humphrey Bogart — these were the people who were most concerned with sheltering their income.
Prior to the Tax Reform Act of 1986, the tax code was full of loopholes that individuals could take advantage of. One favorite was buying rental properties. In 1954, Congress passed a law allowing for accelerated depreciation on any income-producing real estate — meaning that wealthy taxpayers could deduct from their income tax a percentage of the value of the property each year. What made it even better was that more often than not, the property appreciated in value, even as the government provided its generous depreciation schedule. The tax break was used not only by actors making millions but also by lawyers and doctors making $50,000 or $60,000 a year.
Another common practice was to push income generated in year 1 into years 2, 3, 4 and beyond. In 1957, for instance, William Holden was signed by Columbia Pictures to act in “The Bridge on the River Kwai.” The company agreed to give the 39-year-old actor 10 percent of the gross profits. To keep his taxes down, Holden insisted that Columbia pay him no more than $50,000 a year. The movie, of course, was a huge hit, with domestic box office receipts exceeding $27 million ($241 million in 2019 dollars).
It might seem that Columbia got the better end of the deal, because Holden would be long dead by the time the money was finally paid out (also, inflation would erode the value of his take). But if Holden had taken his $2.7 million in one lump sum, he would have wound up putting less than $300,000 in his pocket, thanks to the 91 percent marginal tax rate. By taking $50,000 a year, Holden greatly increased his chances of being able to take home significantly more.
There were two other tax loopholes favored by actors and other entertainers — loopholes that were largely out of reach for the merely well-to-do. The first was the oil depletion allowance. The second was the collapsible corporation.
The oil depletion allowance was created by Congress in 1926. Meant to give incentives to drill for oil, it reduced the taxable income generated by an oil well by 27½ percent. It was, writes Yuxun Willie Tan in the Iowa Historical Review, “the biggest tax loophole in U.S. history.”
Among the first Hollywood stars to understand the tax benefits of the oil depletion allowance were Crosby and Hope. Writes Tan: “They each paid $40,000 to Monty Moncrief (a successful Texas oilman as well as their golfing partner) for a 25 percent share in a West Texas venture.” Tan continues: “For this particular venture, both stars earned $5,000,000 each on their initial $40,000 investment. When the depletion allowance was taken into account, $1,375,000 of the $5,000,000 was tax-free. Other Hollywood stars who experienced similar successes in the oil business included Jimmy Stewart, Gene Autry, Don Ameche and Frank Sinatra, who fittingly titled his first oil well ‘Crooner No. 1.'”
And if your well turned up dry? That wasn’t so terrible; you could deduct the loss from your taxes. As one oil expert put it at the time, “If you are in the 90 percent tax bracket, you are risking only 10 cents on the dollar spent on unsuccessful ventures.” In effect, Hollywood was providing the capital oilmen needed to drill wells. “When you see a group of movie people talking on a set, you don’t know whether they’re discussing an oil well or a movie,” one oilman said in 1949.
The collapsible corporation was the other tax loophole Hollywood stars relied on. Whenever they made a movie, they would set up a corporation and have the movie producer pay their compensation to the corporation, out of which they would take a small salary and pay all their expenses. Why? Because the corporate tax rate was around 50 percent rather than 90 percent. After the star’s fee had been paid out, the corporation would go out of business.
Once again, Crosby was a trailblazer, setting up his first collapsible corporation in 1937. Soon enough, every star in Hollywood was following suit. Sinatra gave his corporations British-sounding names, like Essex, Bristol, Kent and Canterbury. Some stars would sell stock in their corporation to the movie company, so they could take their fee in the form of capital gains, which had a maximum tax rate of only 25 percent. At one point, the IRS sued Groucho Marx and his producing partner, arguing that the $1 million they received from NBC, which aired their show, “You Bet Your Life,” should be categorized as income, not capital gains. Luckily for Groucho, the courts disagreed.
In the mid-1950s, Congress did pass a law aimed at putting a stop to the use of collapsible corporations. But the law itself had a loophole: If 25 percent of the corporation’s income came from a different industry, then it was legit. You can guess what the stars did. They merged their oil business and their movie business into one corporation.
It is true that the U.S. economy did extremely well during the two decades when the marginal tax rate was 90 percent or above. But it’s not right to say the high tax rates didn’t have an impact on economic behavior. They certainly did. When I asked Gary Giddins, Bing Crosby’s great biographer, whether the high marginal tax rate affected Crosby, he wrote back in an email:
“In about 1942, Crosby received a mandate to live on a mere $25,000 (half a million in today’s money). He was earning close to a million, yet always had to hustle to pay his taxes. This fact encouraged him to perform hundreds of troop shows, here and abroad, and to turn down all paid concert appearances, as the money would only go to the government anyway. His accountant told him he was relieved that he decided not to divorce his wife, because it would have put him in a financial bind.”
I’m not saying we couldn’t do with more taxes on the rich. But let’s be careful. When Bing Crosby won’t give a concert, it’s safe to say that the marginal tax rate is too high.
Original Article Posted at : http://www.accountingtoday.com/articles/1950s-hollywood-forged-a-golden-age-of-tax-avoidance-by-movie-stars