In the 1950s and early 60’s, there was a 90% tax rate on taxpayers earning in the highest tax bracket of $200,000 ($1.9 million today). In order to avoid paying almost all their income to the IRS, the rich used loopholes to reduce their tax bill. But even with loopholes, the wealthiest still ended up paying on average of 45% of their income to Uncle Sam, according to the Congressional Research Service.
At that time, corporate executives and sports figures were not among the wealthiest. It was entertainers that were the richest. In 1958 the CEO of U.S. Steel earned $300,000, while Frank Sinatra made close to $4 million.
The Tax Reform Act of 1986, closed many loopholes. One loophole used was a law passed by Congress in 1954, allowing for accelerated depreciation on any income-producing real estate. The wealthy could deduct from their income tax a percentage of the value of the property each year, even as the property appreciated in value.
In what some call “the greatest loophole in U.S. history”, an act of Congress in 1926 created the oil depletion allowance. Enacted to give incentives to drill for oil, it reduced the taxable income generated by an oil well by 27.5%.
Jimmy Stewart, Gene Autry, Don Ameche and Frank Sinatra were among the stars who purchased oil wells. Bing Crosby and Bob Hope each paid a successful oilman (and golf partner), Monty Moncrief $40,000 for a 25% share in an oil venture in West Texas, which earned them $5 million each. Because of the depletion allowance, $1.375 million of their profit was tax-free.
Another loophole which many took advantage of was the collapsible corporation. Hollywood stars would set up a corporation and have the producer pay their salary to the corporation, of which they would use to pay all of their expenses and take a small percentage of compensation, as the tax on corporations was only 50%. As soon as all the money was paid out, the corporation was dissolved. Some of the stars would sell stock in their corporation to the movie company, so they could take their fee in the form of capital gains, which only had a tax rate of 25%.
Congress passed a law in the mid- 1950s aimed to close the loophole. The law stated that if 25% of the corporation’s income came from a different industry, then it was a legitimate corporation. So the stars just combined their oil business with their movie business into one corporation.