There's a Mind-Boggling Number of Rich People in America

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18:37All right.

18:38Owen Zidar:So give us an example that like let's dive into a specific one and I'm just going to choose car dealerships because this is an interesting one. I think everyone knows how a car dealership theoretically is supposed to work. And I don't think you normally think of used cars or I shouldn't say used cars, but car dealers as super wealthy. And yet you have a lot of examples in the book of people who have accumulated millions, if not sometimes billions from this business. So the book opens with the wedding of the century, which is a wedding, Bob and Paul of Brockway, Coral Gables, Florida. they sent their daughter to first to the Amangiri for the bachelorette party was a four-day party where they dressed up like Marie Antoinette but then they flew all the guests to Paris for a five-day wedding on private jets on private jets they rented uh Versailles not for the wedding but just for like what year are we talking about here 23 23 23 24 yeah this was 2023 2024 a few years ago and it was all over social media.

19:42Owen Zidar:I remember this. The wedding of the century. Adam Levine sang the first dance. You could see the Eiffel Tower illuminated in the distance. And they're car dealers, third generation car dealers from Florida, the Mercedes dealer. And they had just sold the dealership for several hundred million dollars to actually a consortium that Nick Saban was a co-owner of. But they dropped$60 million on this wedding. Wow. And, you know, they're not even close to the top of the list in terms of the most prodigious car dealers in the country. So when we like zoom out and look at the industries that generate the most pass through business income, the top 0.1%, the auto dealers were the number one bucket, which we were like, okay, this is not the Piketty story of like billionaire tech or finance.

20:28Owen Zidar:This is something different. What are these car dealers doing or as an example, industry? And then we found them even more when we started looking in like yacht and jet registration data. They just own all these yachts and jets. And that's how we found them by name, because the tax data that we were talking about before, we couldn't identify people that way. So when we set out to write the book and tell a bunch of stories, okay, let's find other data sources. We know the rough signatures. We know where to look. But let's find the people by name so we can tell a little bit more of their background, their story.

20:59Owen Zidar:I love that. Looking at yacht registries to find rich people. It makes sense, but I'm guessing not many people have done it before.

21:04Eric Zwick:Yeah. I'm curious, like from a pure like economics perspective, when we think about, let's say someone's salary, it's like, OK, here is a really talented person. Maybe they're really great with computers. Maybe they have a lovely voice that sounds great on podcasts. And they're like, OK, this is maybe a rare skill, et cetera. So they're going to get a lot of money. Or maybe we think about like someone who makes a great invention or whatever, and everyone wants to buy it and they get a slice of it. And so they make a lot of money. Let's just stick with car dealers, for example. How would you characterize what these very successful car dealers have brought to the table such that the economy has rewarded them with such riches?

21:53Eric Zwick:So that's a great question. I think let me tell two stories of car dealers that kind of give a flavor of the complexity, even within car dealers. So one of my favorite ones is a story we tell in the book is about Larry Miller. And Larry Miller is from Utah. He basically worked in the parts department at a Toyota. And he learned every single almost like your Aldi guy. He like knew all the parts and he turned it from the 961st best dealer of parts of Toyota parts to the first. And he's killing it. He really is good. He started managing a couple different dealerships for the owner. And then he sits down at a Denny's and the owner is like, hey, you know, I know the plan was for you to run things, but it turns out that my sons need to run it.

22:39Eric Zwick:Sorry. and he like you know on his heels he eventually finds somebody else to buy one dealership and that becomes two dealerships and eventually 40 something dealerships and he buys the utah jazz and so that is like you know the good story he developed some skill he really was actually on that last point can you clarify okay so he really gets to know the parts better than anyone else Can you actually just operationalize that a little bit more, what he contributed to the market, so to speak, such that either at his first place of employment or at his own entrepreneurship, they go from 961 to 1 or whatever it is?

23:19Eric Zwick:Yeah. So I think it's, you know, when you're dealing with customers, it's being really responsive, understanding what they need and just, you know, being hardworking and diligent and delivering and having a reputation for, OK, if I have some need, I'm going to go to this guy. Yeah. And it grew over time. That's one broader lesson of the book is that it takes a long time, you know, in contrast to the Silicon Valley, move fast and break things. It's often move slow and make things. It takes decades often. So that's kind of, in my view, Larry Miller is the good case. But the more troublesome case where you have more regulatory capture are other auto dealers who are quite protected.

24:01Eric Zwick:And we can go into the history of auto dealers if you want. But the short version is they have a bunch of legal protections that were meant to protect the little guy from big manufacturers of auto companies. Ford or GM might put a bunch of cars on your lot, and that was hurting the small guy. So over a series of decades, there are a bunch of franchise protections. And then if you go forward to, say, 2008, when we had the financial crisis, the auto team had to deal with the situation where Chrysler, for example, had three times as many dealerships as Toyota, even though they sold the same number of cars.

24:37Eric Zwick:And so they had all these extra dealers. And why do they have them? It's because they have a bunch of protections where you have to pay them off. You have to pay three years of rent and a bunch of things that really don't make sense. And so there's a lot of protections from local competition. There are pretty sweet deals that were in the name of protecting the little guy that don't make a lot of economic sense. So I think some of it is rents. And both of those things are true. And that's partly why things are complex, is that you can have stories like Larry Miller and you can have regional auto dealers that are getting more money than they probably would because they're getting paid a lot for warranties for example that are a little more than the what the market would would pay them otherwise they have a local monopoly sort of like

25:16Owen Zidar:you can you know you can't sell the toyota within a geographic boundary of the existing dealership and the manufacturer has very limited power to affect that competition anyway to introduce so there's really barriers to entry that's a big part of it and then they sell these ancillary services in the dealership where the markups are much higher than on just the immediate sale of the car. So the warranty repair, the financing is a big source of profits, I think, for the dealers. And it's like, well, are you going to buy, you can get the loan at the dealer? Are you going to go to a bank separately when you're buying the car there on the lot?

25:50Owen Zidar:So this first mover advantage to sell all these ancillary services. I think it's a huge part of the margins and the profitability of these dealerships. And as the economy grows, you still have this like fixed entrant, you know, and like you can't get a car through any other pipe other than through that pipe. And so they just grab a chunk as it's passing through. Yeah, this was really interesting to me in the book because we're used to thinking about antitrust or competition issues as these like big national scale companies. But actually you talk a lot about sort of regionalized competition problems, which was very interesting.

26:27Owen Zidar:I have a bunch of other questions, but I want to ask you one more just on sort of local regulatory protections and loopholes. Can you talk about beer distribution? Because that was a really interesting thing, one to me. We were very amused by the beer distributor. So one of the things for folks that are listening, if you're like walking, like I walk from my home to the office and pass by a truck that says Budweiser on the side. You know, Budweiser doesn't own that truck. A distributor does. You look on the door and there's the name of the distributor. You might see Reyes or somebody like that.

26:56Owen Zidar:These are incredibly wealthy businesses that sit between manufacturers and end users, like bars, restaurants, groceries, and so on. And depending on the state, similar to the auto dealers are these franchise protections. So you have to pass through the distributors and these way these contracts get protected. So then, you know, as demand for beer grows, the distributor is just sort of like in the middle. This middle tier was, again, sort of protecting, you know, the little guy from the macro brewers. But over time, these little guys have become really big guys. And the idea was you didn't want the big brewers to dominate distribution as well as the actual selling of the product.

27:35Owen Zidar:That's right. And it sort of emerged post-prohibition as this like sort of system. Let's avoid the situation where the manufacturers have so much power over the rest of the system in terms of what is available. But then the distributors end up having just a ton of power and they get super rich. to the show up within the jet data a lot. And there was this conference in San Antonio and the mayor called the lobbyists to organize the conference was like, you know, this is amazing. I've never seen so many jets at the San Antonio airport as when the beer wholesalers were there. Yeah.

28:08Eric Zwick:You mentioned a disagreement or a different interpretation than capital, picketing size, et cetera. What is the essence of the conclusions or the things that you've discovered that you feel like someone coming at the wealth inequality question from their work, you would have a different interpretation of it. But we've never actually had either one of them on the show. So maybe we'll get them on soon because we should. But what is the sort of the crux of how you see things differently?

28:36Owen Zidar:So we joke that our book is kind of like pickety with people. So if you happen to read Capital, which is a difficult read, I think we actually also joke that our book we wrote so people could read it, not just collect it because that book it's a really good read i'm just going to reiterate that yeah so it's like we're going to have you know that book is like the top one percent is this kind of nameless faceless entity um and they're just generating capital income and so you kind of are meant to think about almost gilded age monopolists who have massive companies and are just collecting the rents or the capital income or the interest or whatever and um it's about this accumulation of massive troves of wealth that are generating this almost passive return and we're saying well Well, actually, when you look at the data, it's actually more this like these millions of private business owners who are actively owning and operating businesses in a large case.

29:26Owen Zidar:Their concentrated portfolio is really the business is kind of the main asset. And it's not really just financial capital. It's kind of like human capital is a pretty important part of it. Broadly defined, it's sort of like the networks, the experience. Maybe it's like having access to the contract or the special market position. That's an important asset. But that's like sort of a different story about who's really rich. That's sort of this more active kind of human. And yeah, they're good, bad and ugly of the humans there. But that's kind of the distinction I think that we draw. Since you talk to a lot of these people, I have a sort of anthropological question, but do they see themselves as wealthy?

30:06Owen Zidar:Because we touched on this in the beginning, but everything is sort of like shaded as small business ownership, entrepreneurs. You talk to a lot of people who like did start from humble beginnings, but now have millions and millions of dollars. Do they see themselves as the rich, as the one percent?

30:23Eric Zwick:Usually they have a pretty good idea. Often it's because it takes so long to get wealthy. They've gone through the life cycle. So one of my favorite characters that we talked to in the book is Dick Portillo. And he started, he grew up in the projects of Chicago, the Cabrini Greens, and he didn't know how to make a hot dog and then started a hot dog company and was washing the dishes by hand because there wasn't running water. And he ended up over decades selling a lot of hot dogs to become a billionaire. And I think it's a really useful example because it shows like, well, do you have to have market power to be a billionaire?

31:00Eric Zwick:No, you can actually sell hot dogs. It's a super competitive industry. And then is he rich? Well, he has a really big penthouse. He's got a yacht called Top Dog, which is just a great name for the yacht. And, you know, so it depends on when you're talking to him. I think when he's washing, you know, when you find him in his 30s washing stuff by hand, he does not feel rich. but when he's got a yacht and you know a huge IPO that they couldn't send him a check because his bank account wasn't sophisticated enough to take the check when he was just like I'm getting on my yacht and leaving like I think he knew the short answer is it depends on where when in their lifetimes because it does really take a long time like there's another woman who talked to she spent two decades making frozen quiche oh yeah the quiche lady yeah and she you know it was pretty tenuous for a long time before she got some big contracts to go through.

31:50Eric Zwick:And so, you know, I don't think she felt that wealthy from her business. Like, it seemed like it was losing money until it really wasn't. This is maybe more of like a sociological question than an economics question, but I think it kind of relates to who feels rich and who doesn't. When I think about like coastal rich, and by that I mean like San Francisco or New York City rich, I often think about heads of like really gigantic, heavily bureaucratic, layered hierarchical organizations. You know, I imagine someone like Jamie Dimon or the CEO, there are numerous layers. A, they're often like very educated.

32:29Eric Zwick:And there are also going to be just like numerous layers of the organization. And there will be people who work at J.P. Morgan or whatever, who never interact ever with the CEO, et cetera. Whereas in my mind, the sort of everyday millionaires, the head of the beverage distributor and the car dealership, in my mind, I suspect these organizations are like that CEO is probably much more in touch on some level on a day to day basis with the mass of like the workers at that organization, maybe on the floor with them, many cases like at a dealership, etc. And I'm curious if that resonates and whether that's sort of like, you know, when we think about sort of, you know, someone who has a yacht is obviously mega rich.

33:17Eric Zwick:But on the that's unquestionable. But also that just on a day to day basis, I suspect they have a lot more connection and like interaction with capital W workers than many sort of like the coastal rich do. Yeah.

33:31Owen Zidar:So like the Portillo, when he was growing the business, they didn't have offices for the managers because he wanted the people to be on the floor all the time. So there was a bit of a Marine ethic that he kind of brought to running this business. And he was there for opening. He was like very detail oriented. He had no investors. He owned all the real estate. He tried to take no debt, reinvesting every dollar. He had kids, but like it was pretty clear when he was moving into his 80s. This is not a family business. This is Dick's business. business and there's kind of a relentlessness to that character that i think we see in many of the stories um the first generation founders look like that yeah one thing that stood out to me is like all of these people don't seem to have hobbies they hate hobbies yeah they hate john osher is so funny that dr john who's not a doctor who started a five dollar electric toothbrush and sold that business after having sold other businesses before and probably had enough money before starting that business, but he tried to take up golf from Florida.

34:31Owen Zidar:He's so bored by it. Maybe not a great swing. I don't know. But went back and started this$5 toothbrush business in the dot-com era, which is exactly the kind of company you would think would make you hundreds of millions of dollars during the dot-com era, selling$5 electric toothbrushes. But that's what he did because he just couldn't sit still. I mean, he had a personality clearly because even as a kid, his first business was um don't tell your son no i gotta get it's immediate what i gotta tell let's hear it his first business so his parents he just took like one of those painting classes where you like have models come in and do the like the nude paintings and they hid the paintings from like five seven year old i don't know like uh in the attic and he would charge a nickel to

35:18Eric Zwick:his friends to look at the paintings i would love this yes that's the best margins of any

35:24Owen Zidar:business he ever started.

35:25Eric Zwick:He can't listen to this episode. I'll stick to the children's book.

35:32Owen Zidar:Yeah, yeah. Maybe you just paint still lifes.

35:36Eric Zwick:Can we talk a little bit about, you mentioned dentists, and I'm sort of curious whether dentists or doctors, what is their role in the story of the medical profession and how rich can they get? Yeah, no, that's a great question. Because there's kind of the Dick Portillo's, more tactile, blue collar, rich, and then there are the more white collar ones. But if you own eight dental practices, you can be really rich. I mean, I think if you're just a normal dentist, you have a pretty good life. But if you own a few offices, you can have a great life. Dentists have some amazing stats. I think they're number 21 on our list of top pass-through four-digit industries by profit.

36:15Eric Zwick:And if you add up all the revenue of dentists in America. It exceeds the revenue generated by the NFL, the NBA, MLB, basically all professional sports and dentists are earning more. The joke we like to tell is that everybody's got teeth. And so if you own several of these, this is great. And then they also are in every congressional district. And so when you think about things like, oh, let's include dental services and Medicare, for example, they lobby against that to be like, well, we don't want price pressure from the the government, we want to make sure we can protect. So there is a bit of regulatory might, and that's really the case more for doctors too.

36:54Owen Zidar:Yeah, the doctors showed up in one of our early statistical breakdowns when we were trying to figure out, okay, who are these people entering all this pass-through income? We said, what are the top four-digit industries in the top 1 %? Doctors offices was number one. So this is like, there are industry codes by the BEA. And so four-digit, there are about 300 industries in the four-digit system. So that's like a pretty We're fine. Like doctor's office is different from dentist's office is different from like a physical therapy type industry, as an example, within services. Doctors were number one in terms of the number of amount of profits.

37:30Owen Zidar:And they had just a ton of them.

37:32Eric Zwick:Is it true that like dentists, like they're all really bored, so they get really like tempted to finance films? Isn't that like a big thing where it's like filmmakers like go to dentists like this would be more exciting than teeth. Put one hundred thousand dollars into this film.

37:46Owen Zidar:they are i think sitting on pools of cash uh and maybe they don't have so many ideas of what to do with it and so they make for maybe easy targets because it's a big pool of cash uh you know there's a lot of fishing to be done in that pool

38:16Eric Zwick:some people treat chat gpt like some kind of smart search engine and some use it to get work done chat gpt work is a new way of working in chat gpt that can take action across your apps and files stay with a project for hours if needed, and turn a goal into finished work. It's designed to help you move from a chaotic starting point to a reviewable first version. So all the source materials, briefs, and scattered information that you have to grind through to turn into something useful can just become something useful. Put ChatGPT to work on your most ambitious ideas and projects. Get started at ChatGPT.com by selecting Work Mode, available on Plus and Pro plans.

38:59Eric Zwick:If you listen to financial news, you know a lot of time is spent thinking about what's next. The next opportunity. The next investment. The next move. But sometimes what matters most is being ready for what you never saw coming. A storm damages a second home. A pipe bursts above a collection you spent decades building. An unexpected loss puts a growing business on pause. Those are the days no one sees coming. But for more than 75 years, Cincinnati Insurance has been ready when they do. With deep expertise, coverage for businesses, homes, valuables, and more, Cincinnati Insurance works with independent agents who take the time to understand what matters to you.

39:38Eric Zwick:Together, they help protect more than what you own. They help protect what you're building toward. And when a bad day does come, Cincinnati Insurance has real people there to help make things right. Because planning for the future isn't only about knowing what's next, it's about making sure you're ready for what you can't predict. Let Cincinnati insurance make your bad day better. Find an independent agent at CINFIN.com. This is Robert Smith from Business History. If you're listening to this, there's a good chance you're a small business owner. And like every small business owner, you started with a dream to do what you love and watch it grow.

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40:33Owen Zidar:So speaking of dentists and doctors, this reminds me, you have a working example in the book showing how the S-Core pass-through tax benefits actually works for, I think it was for an anesthesiologist. and the one who is in private practice who has their own S-Core pays less tax than the one who's employed and earning income. What exactly are we incentivizing or supposed to be incentivizing through the tax code here? Because again, these are two people who are ostensibly doing the same jobs. One is paying a lot less tax than the other one by virtue of the pass-through arrangement. Yeah. So we are taxing salaries at a different rate than taxing business income.

41:19Owen Zidar:And so that anesthesiologist that runs most of the business through the S Corp is not paying payroll tax, not paying like ACA sort of surcharge, which is uncapped Medicare tax on the profits that come through, which is maybe particularly galling because they're billing Medicare for so much services. and they themselves on their mostly labor income aren't paying the Medicare tax on it. So there is a minimum level of compensation, which the IRS rules say you're supposed to pay yourself in wages, so you pay payroll tax on that. Everything above that reasonable compensation limit is kind of profit and just falls in this other bucket.

42:00Owen Zidar:And then in the 2017 reform, they brought down the pass-through rate even further from, say, the top rate of 37 % to below 30%. They put in these guardrails for doctors and skilled service professions, so they couldn't get that rate. But there are strategies that certain ones take to try and move a bunch of the ancillary services again, or the surgery piece, or maybe they rent some real estate back. And so they can shift more and more of that income, I think, into forms that then get that below 30 % rate. Whereas the surgeon that's working in the hospital system as a salaried worker is paying the top individual tax rate, 37%, the payroll tax, another 3%.

42:39Owen Zidar:You have all the state and local taxes. The cap on state and local tax deductions applies to that salaried worker. But if you run all your income through the business, then the states have allowed them to basically take the deductions through the business instead and get that uncapped. What's the thinking behind this? We just want lots of small businesses to be created, and so here are some tax benefits. I think it's kind of an unintended consequence of trying to simplify the tax code for the mom and pops in the small business. And then people sort of look at the rules and say, well, how do I minimize my tax given the rules are what they are?

43:13Owen Zidar:And then how do we protect those loopholes that sort of pop up over time? I like to think of the tax code like a house that sort of depreciates over time. And you kind of need to like invest in it, like repair windows, replace the floor, this kind of thing. These loopholes are like the depreciation that's applied to this house over time. The reason they've been so persistent, we haven't fixed them, is because it turns out that like a quarter of federal elected officials are also passed through business owners.

43:42Eric Zwick:Oh. Yeah, this is always like my impression is like, you know, pick a state, Iowa or Ohio, and it's like, you know, like it's some politician who's worth$100 million. But they often tend to do very well. And they like position themselves as like, you know, popular among the working class voters. And they probably do connect well with them, in part because they like, this is what I was going back to, they're on the shop floor, they probably do connect with those voters better than like, you know, CEO of a big bank who's like completely disconnected from them. But on the tax question, specifically, you know, when it comes to the prospect of raising revenue for the government or raising taxes, you get a litany of issues.

44:28Eric Zwick:So A, no one likes paying higher taxes, period. Then there's you get to say, well, you know, we don't want to disincentivize entrepreneurship or success or whatever. And taxes are bad for that reason. And then there's the third layer. It's like, well, even if we want to have higher taxes and even if we weren't worried about that, it would be impossible. And the rich always find a way. And so it'd be self-defeating. There's no way to like actually you can't do it. They'll find some loophole or whatever. in the that third part i'm really curious about is that real or for in your research like if there were the political will to raise taxes are there straightforward ways to do it yeah so it's certainly real i mean we could start with the most recent before so first of all you asked for about iowa and ohio so ohio the senator one of the senators is bernie moreno who's an auto dealer so that that's a great uh a great one and he had a proposal with elizabeth warren to shore up Social Security.

45:26Eric Zwick:How do you want to do it? You put it on the payroll of all these salaried workers. There's no mention of these very wealthy business owners, like it's all salary. So the anesthesiologist that you were talking about before, one of them is getting off scot-free and the other one is paying a lot more. So I think that's one very recent example. Now, it's interesting. We've been talking to folks on the Hill about what the prospect of Raising taxes on the rich is one natural place to start is this trillion dollar tax cut that was part of the one big beautiful bill that no one likes to talk about. And even among democratic staffers, there's a lot of reticence of like, oh, I don't know, small business.

46:10Eric Zwick:And you're like, this is not small. If you take all pass-through income, only 20 % of it is actually small business, according to an old treasury study. The vast majority are big businesses that happen to be private. And so I think the most realistic thing, if you can't get rid of some of these loopholes, is to limit them by income. And that, to me, seems like one path. When you say limit them by income, just explain that for a bit. So say you cannot get a deduction that takes your rate from 37 to 30 if you have income in excess of a million dollars or 400K. You pick the number that, I don't like these numbers, but that would be one mechanism for saying, okay, somebody has more than a million dollars in business income, like they're doing very well.

46:53Eric Zwick:You can't plausibly call them small.

46:55Owen Zidar:This reminds me, actually, can we talk about the role of private equity in wealth creation? Because again, when we talk about a lot of these businesses, whether it's HVAC or I don't know, veterinarian services or dentist offices, a lot of the exits come in the form of a PE buyout. We love this line from your colleague, Matt Levine, who tells this joke, what am I doing after business school? Oh, I'm going to work for a prestigious private equity firm in San Francisco so I can run their plumbing company in Mississippi. And I teach private equity to MBA students and I talk about these unglamorous deals.

47:31Owen Zidar:So we're talking about founder-owned firms and more than half of the deal, the typical deals in the pipeline from private equity are going to be founder-generated firms that maybe there's no natural successor. So private equity sort of comes in and says, we can take the baton, and maybe we'll be willing to pay a pretty high price because we can see the growth trajectory for it. And so they're looking for these unglamorous businesses that are quite profitable. Maybe they have some competitive advantage because of either a barrier to entry or established brand and customer network and so on. And they're going to go in and take it over for the founder who doesn't really want to give it to the kids or doesn't have a kid that wants to take over the plumbing company.

48:09Owen Zidar:So private equity portfolios, if you go below the glamorous New York job where you go like where they're actually on site, what are they looking at? It's a mid-market manufacturer making cabinets or it's sort of the shade store or something like that. These regional businesses that they want to grow further, maybe consolidate a few of them. Maybe they can list it or break it up or whatever down the road. But it's transformed finance in a way because a lot of capital is flowing. Yeah. And there's the end point.

48:37Eric Zwick:Are these search funds? Is that what they are called? Like, I've heard that term. And I'm curious, I've been like seeing the, you know, people on Twitter, but they like, oh, all this stuff, I'm rolling up cabinet makers, or pool servicing providers or lawnmowers, or like, I imagine like a pest repellent is a pretty big thing. But I've been reading about them for like a long time now. Is there still more juice for the squeeze? Is there still a bunch of these boomer businesses where the kids don't want it? And in theory, you could take over the local lawn maintenance company and make more money or how much is left there?

49:15Owen Zidar:Well, we think about the great wealth transfer, right? This tens of trillions of dollars of wealth in the sort of silent generation or baby boomer generation. More than half of that is like in the form of business wealth. But there's a huge amount of business wealth that's coming. And there aren't necessarily kids or great people who want to run it from within those businesses. Some of them are too small to attract private equity and trust. And so, yeah, so I see students. At first, it was like a few students that knew about the search fund thing. When were you saying? I started in 2014 teaching, and I was talking about search funds.

49:50Owen Zidar:So this is like a student spends two years, usually have a partner looking for one of these businesses that's kind of too small to attract private equity interest. So they can do a mini LBO. They can do a mini buyout. If they find a good candidate, the investors that funded the search will do a second step. So there's optionality for the investors that makes it such that even the median return in search funds is negative. Most of them lose a little bit of money because the search doesn't work. But the average return is like low 20s, I think, in the sort of data is a little hard to come by. But I think the people who are trying to do a good job of comprehensively measuring it and it's rolling up pest control businesses.

50:31Owen Zidar:One of the most successful ones I talk about in class is drug treatment facilities in California. There was like a huge growth in demand for that, unfortunately. And these facilities running them, running them well, doing the billing, doing the kind of, you know, they're running those businesses. is complicated, a lot of regulatory things you have to manage as well. But that person, that was like 100x investment for the investors. And for the founder, oh, I could go to banking and then maybe flip into PE and then maybe get like junior partner and get up there in like a decade, 15 years or something.

51:03Owen Zidar:Or I could like start this business and run a business, get all this weird experience doing deals, industry learning, raising money, operating something, like kind of bootstrap my way into being a seasoned founder and an executive and own 20 % of the company on the other end if it does well. This also reminds me in terms of just creating an environment that encourages entrepreneurs, you actually found some really interesting or did some really interesting research showing that if you are in a place with a lot of entrepreneurs, you are more likely to be a business owner yourself. Yeah.

51:40Eric Zwick:So one of the The cool data things, to go back to the very beginning when we built this data set that for the first time linked owners to businesses and their workers, we could track every single new firm in America since 2000. So we have the best data on entrepreneurs that has ever existed. And we can say, how many people are going to start businesses if they're poor, if they grow up in Salt Lake City versus Mississippi? So Salt Lake, the probability you start a star business, meaning the top 10 % of revenue or employment, is three times higher than if you grew up in Mississippi. And anecdotally, it's not entirely clear what's going on.

52:20Eric Zwick:There's the nickname Silicon Slopes of Salt Lake. But some of it might be that there's a large Mormon population. And a common thing to do is to go on missionary work and bang on doors and have people tell you no. And you keep going. You get some resilience and grit. And like there's no hard data and that's what's going on. But that seems kind of plausible to me. So that's one thing. And you see it also for the children of business owners. They're way more likely to start a business themselves, even if you take all of the family firms out of the data. So it's like you're not just inheriting – your son is not inheriting the podcast, but just hears all about money all the time.

52:57Eric Zwick:Yeah, round two. Fourth generation podcast. Yeah. You have to start the S-corp first. You know, I'm sort of curious. It's still the search funds thing. You know, one of the things you hear is like, OK, some guy is a pool company. Well, maybe people like that guy and maybe like some then some guy from Wharton. It's like, we don't know you. We don't. And so I imagine that's tricky. And then also I imagine, you know, the cost of labor has gone up and low end wages have risen a lot. And of course, immigration crackdowns, etc. Are people stepping on, do you see a lot of people stepping on rakes here and they're like, you know what, maybe this business idea to like, you know, power wash people's sidewalks was not quite the path to riches that I expected it to be.

53:48Owen Zidar:So there is risk in doing it, right? But you can take that experience as long as you don't do anything illegal. Okay. You actually have on your resume this experience. Okay. You learned a bunch of industries. You did a bunch of kind of deal M &A type work, basically analyzing industries, making pitch decks, this kind of thing, like leading up the search. So that actually is part of maybe the sales pitch if you decide to return to the workforce or do something else.

54:15Eric Zwick:Do people get SBA loans? Like, is there like publicly subsidized leverage for these buyers?

54:21Owen Zidar:It is possible. Most of the debt that's used in those deals is coming from banks. OK. I mean, they're established businesses with a decent track record, most of the case. So like you can really you can leverage that. They're not leveraging like 80 percent leverage. They're more like 40, 50. The typical search fund deal is there's a lot of equity there, too. So I think there's more cushion than a typical larger LBO. Just going back to the Piketty part of this conversation and the idea of income inequality. What do we see when we look at the S-Core data in terms of how much is actually accruing to owners versus workers?

54:57Yeah.

54:58Owen Zidar:So it is quite striking. There are different ways to think about growth of this group and their income. It's like, is the pie growing? Are they just capturing a bigger and bigger slice of a pie that's not growing? And we can sort of decompose the growth. So first of all, if you look at the growth of the business sector, more than half of it, like 60 % of the growth over the last 25 years is coming in pass-through form. So there's a lot of economic activity coming in pass-through form. the pie is growing. The share that the owners are capturing of the pie has gone from like a third or 40 % to like 50%.

55:33Owen Zidar:They're capturing a larger and larger slice. Can I just ask, what's your explanation for that? I think some of it is, it's easy to think about in the skilled services, the demand for the skilled service at the top, that doctor's practice is really driven by kind of the scarce factor being brought, which is the expertise, the reputation of those folks at the top of the business. So they can just raise the price. I mean, it is the case that we have 30 % fewer doctors in the OECD average. So the AMA is helping restrict the supply of doctors in a way that's quite useful, the American Medical Association.

56:10Owen Zidar:So as demand grows for that stuff, there's a lot of surplus, but you don't need to pay the nurses or the assistants in that medical practice. So there's a piece of it there. I don't know, like in some of the other industries that are more competitive. Maybe there's a mixed productivity and invention and stuff, but I think that's an important part of it.

56:31Eric Zwick:Yeah. So we tell different examples. We have a colleague, Kevin Murphy, who's one of my favorite economists, and his first language is economics, not English. He can just go up to the board. Just as a quick aside, as a first-year faculty member, I went and sat in this class. It was the most amazing class. You sit there and he's like, what are you guys interested in? It's like, why is the labor share falling? And he just goes up to the board and just derive like three or four equations that have the most coherent and beautiful. And he just does it. That's cool. So anyway, so Kevin, he does some econ consulting.

57:04Eric Zwick:And if Kevin makes a merger more likely to happen, say it's 5 % more likely to happen, this is a billion dollar merger, that's a lot of value from the perspective of the people paying them to try to help the merger get through. And so mergers are increasingly valuable as the economy grows and Kevin's just doing his thing. And so I think that's also part of the story. So some of it is real skill and expertise. Sometimes it's induced scarcity from policy. And all of those things are kind of a blend. It depends on the complexities of what specifically is going on in that industry. But a material part is a bigger slice of the pie.

57:40Eric Zwick:And then also another big chunk is growing the pie. And both of those things are true. And we have stories and examples where workers are brought up along the CEO And then in other examples where most of it is just going to the owner. And that's a big part of what's actually going on in the data for rising inequality. It's a bigger pie and a bigger slice. And it's like 50-50 for the quantitative breakdown between those two.

58:05Owen Zidar:Profit sharing isn't the default motive, I think, for these folks, especially the first gen. They're not like, oh, how do I share more of the profits with the workers? It's like, well, I pay people for what they do and I incentivize them. And then if we have more money at the end of the day, I'm going to reinvest it in the business or I'm going to take it. And that's kind of like the mentality of this founder generation, especially. This chemical importer exporter called ChemImpacts, you know, really like sexy name. There are a lot of unsexy names in this book, I must say. This is right. Glamorous, right.

58:38Owen Zidar:We like to talk about like the NBA player who made way more money running Wendy's franchises than being an NBA player, Junior Bridgman. So yeah, the whole franchise thing is a whole nother list of unsexy businesses to get really rich. But the Chem Impacts, she talked about how they were able to offshore and have the middle of the business sort of Indian people helping with the supply that through their family they were able to connect to and hire. And so they're using the same kind of ways to offset sort of labor scarcity or to reduce labor demand, I think. And that then means that they can be more productive.

59:15Owen Zidar:but the workers are not capturing those proceeds.

59:19Eric Zwick:Let me just give you some numbers because they really are striking. So I think if memory serves, in 2001, the value add per worker, so that's like add up profits and pay for people, was$34K a worker. And then that went up$18K to$52K in 2021. So there's$18K per worker of growth. Owners got 15 of that and workers got the rest. So like the numbers are really striking in terms of how big owners – that's part of why there's so much abundant wealth in America. That's why when you go to California or any nice mountain town or any nice lake, there's a lot of boats. Like I used to go to the Lake of the Ozarks when I was growing up and there's so many people with huge boats and you're like, what are these people doing?

1:00:07Eric Zwick:And it's pest control. It's all of these, you know, they're making the windows for drive-thrus, for example. Like there's so many stories you hear. And one of our favorite things now is just to go ask people like, who is the richest person in your high school? Like, what did they do? And the stories, I mean, we have a list of hundreds and hundreds of millions. We didn't even put in the book because there's too many good ones. It's a pretty fun game.

1:00:30Owen Zidar:Invented Post-its. Does anyone get that reference?

1:00:34Eric Zwick:Oh, what's that from?

1:00:35Owen Zidar:Romy and Michelle's High School Reads. Yes, yes.

1:00:38Eric Zwick:I knew this. Yeah.

1:00:40Owen Zidar:All right. Eric and Owen, we're going to have to leave it there. But thank you so much for coming on AllBots. The book is The Everywhere Millionaire, and it is very, very good. So thank you so much. Thanks so much for having us. Yeah, thanks. That was great.

1:00:53Eric Zwick:Thank you so much.

1:01:07Owen Zidar:So, Joe, I know I've been kind of gushing about this, but I do genuinely think that this is a piece of research based on a novel data set, to your point earlier, that has been missing from a lot of the discussion of the U.S. economy and what it looks like. Now, when we talk about billionaires, when we talk about rich people, we are so used to thinking about public companies, CEOs, tech, venture capitalists, that sort of thing. And as Owen and Eric have pointed out, the fields of millionaires across America is much more varied than that.

1:01:40Eric Zwick:No, I couldn't agree more. I think this is such an important conversation and it's so interesting. I do think the one there is one part that I think is fairly understood. People know a that car owners are significant within their congressional districts. I think people have seen a lot of car owner politicians. They mentioned Bernie Moreno. I think people have an intuition that car owners are often influential, particularly in the Republican side of the aisle, etc. But I think like, OK, that's car owners. And I think the idea that there is this big swath of similarly structured businesses and across so many different industries with political influence is not sufficiently appreciated.

1:02:29Eric Zwick:when people talk about inequality and when people think about the tax code, because there is so much talk about like, you know, taxing wealth in California. And I do think that if we're going to have, you know, at any point, if we're going to meaningfully raise revenue for the federal government, if we're ever going to do something to ameliorate inequality, then like clearly tech wealth, et cetera, is part of it. But there is so much more than just public company equity wealth that constitutes wealth in America that not only does it not really get talked about, but because people have this sort of impulsive love for small business, it's almost never on the table.

1:03:12Owen Zidar:Right. And it is worth really asking what you're incentivizing through the S-Core structure if the idea is like, oh, well, we want a bunch of small businesses, but in effect, you're protecting a bunch of companies that are generating like millions of dollars in revenue.

1:03:26Eric Zwick:Totally. And I like the characterization of the tax code as a house. Yeah. The idea that like the economy evolves. I mean, the economy evolves for structural reasons. There are new technologies, there are new things, so there are new types of businesses. And then, of course, tax optimization strategies evolve and people slowly discover there are different ways to structure their own work and business so that they can take advantage of lower rates, et cetera. And so the idea that like we need to, I mean, it seems like mostly it's a one-way ratchet. Taxes just keep going lower. But the idea that like, no, like we need to repair this.

1:04:03Eric Zwick:We need to fix this. We need to adjust it for the current conditions rather than just finding places to cut. I like the house analogy.

1:04:12Owen Zidar:I think of the tax code as an amorphous blob that people are always poking with a stick.

1:04:16Eric Zwick:Can I just say something?

1:04:17Owen Zidar:Yeah.

1:04:20Eric Zwick:no people like us who are like wage earners at companies who just get like a normal w-2 income we are truly the most oppressed class in america no i don't believe that but you know what like all like the only people the only like the only sort of class of people that really does not have some like very obvious way to minimize taxes is basically just workers at companies.

1:04:49Owen Zidar:Poor us. Poor us. All right. Shall we leave it there?

1:04:52Eric Zwick:Let's leave it there.

1:04:52Owen Zidar:This has been another episode of the All Thoughts podcast. I'm Tracy Allaway. You can follow me at Tracy Allaway.

1:04:58Eric Zwick:And I'm Joe Weisenthal. You can follow me at The Stalwart. Check out Eric and Owen's book, The Everywhere Millionaire. Follow our producers, Carmen Rodriguez at CarmenArmond, Dash O 'Bennett at Dashbot, Kale Brooks at Kale Brooks, and Kevin Lozano at Kevin Lloyd Lozano. And for more OddLots content, go to Bloomberg.com slash OddLots. We have a daily newsletter on all of our episodes. And you can chat about all of these topics 24-7 in our Discord, discord.gg slash OddLots.

1:05:24Owen Zidar:And if you enjoyed this conversation, if you want us to do more episodes on the U.S. Tax Code, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.

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