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Speaker 1: Bloomberg Audio Studios. Podcasts.

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Speaker 2: Radio. News.

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Speaker 3: We know America is a rich nation, but do you know exactly how rich?

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Speaker 2: Who holds all of that wealth? To help us unpack this and what it might mean for your prosperity, let's bring in Owen Zedar and Eric Zwick. They are professors at Princeton and the University of Chicago, respectively. And they are the authors of a fascinating new book, The Everywhere Millionaire, Who is Really Rich in America and How They Got There. So, guys, I'm fascinated not only by all the data and the information in the book, but But how the book came about, you were effectively hired by the IRS and Treasury to do a data analytics. Tell us a little bit about that.

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Speaker 4: Thanks for having us, Barry. It's great to be here. Right out of grad school, we were PhD economists. We were brought in to work with folks at the Treasury and the Office of Tax Analysis to work on a project linking businesses to their owners and workers and this pass-through business sector had grown dramatically over the prior 40 years. And it was difficult for folks to basically estimate how much tax those businesses were paying because the businesses don't pay tax themselves. You have to link them back to their owners to figure out the individual owner's tax position. And so this was a project that was really important for tax policy. And it turned out to be a lever for us to learn about much more than tax policy, income, wealth, and prosperity in the country.

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Speaker 2: Almost accidental that you guys created this massive database of those tax records. What was in that data that all of the other surveys and data we see from Commerce or the Federal Reserve? I'm a fan of the Survey of Consumer Finances. What did you guys find in this database you created that those surveys missed?

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Speaker 5: So the Federal Reserve Survey of Consumer Finance is fantastic. We don't want to say anything bad about it. It's a big effort to collect it, but it's fundamentally much less rich than the.

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Speaker 1: Data we put together. So the data we put together is a panel.

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Speaker 5: So you can do things like study every business that was created and trace how well they're doing and what allows them to succeed. A second dimension is that you can see much more granular information about industries and geographies. to learn about where wealth and opportunity are in this country.

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Speaker 2: So that raises really a fascinating question. What did you find in your data analytics that's in the book, The Everywhere Millionaire, that was a key misconception that the very broad, non-granular Federal Reserve surveys just don't have access to? What misconception did the data force you to abandon?

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Speaker 4: I think we call it the everywhere millionaire because what we learned was that top wealth and income and just this wealth is like much more abundant and also closer to home for more people than we previously thought. So if you thought all the wealth was on the coasts, that misconception we basically upended because- You know, we put our everywhere millionaires on a map and the whole country lights up. If you thought it was just in tech and finance, which maybe was a bit more our prior going into this work, it turns out it's all across lots of industries, including many unglamorous sort of more blue collar industries that we hadn't really thought about as paths to wealth at the top. And if you thought it was just the Forbes 400 billionaires that were getting extremely rich and driving inequality statistics, well, no, that's not true either because we're talking about millions of people. So we have 3 million everywhere millionaires, we say have net worth of at least $ 5 million that are private business owners. And that's just, they collectively have more than 10 times the wealth of the Forbes 400 combined. So again, just like this much broader picture of wealth than we thought we had going in.

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Speaker 2: So let's talk about all those unglamorous businesses. You write about auto dealers, HVAC companies, medical or dental practices, restaurants, distributors, sanitation. These aren't remotely sexy. I have to ask the question, they may not be sexy, but they're obviously very lucrative. Why has this group been so consistently underestimated?

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Speaker 5: You know, it's fun to talk to people, even NBA players like Russell Westbrook, when they're trying to make money. We have this quote in the beginning of one of the chapters that's like, unsexy is sexy to me because he went and bought some of these types of businesses. I think one reason why they're consistently underestimated is it's very hard to know who's rich. You know, public companies have to report to their shareholders and file information. There's investigative reporting on the very richest people. But I think Celebrity billionaires have really monopolized attention. And with this better data, we have a brand new view for who's really rich in America.

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Speaker 2: Yeah. Coin operated laundromats and car washes like some of the some of the businesses are kind of astonishing. One of the things that I've always noticed when I'm so thrilled about this book, which is really just an exercise in confirmation bias to me, is every time I visit a new city, every time I go to a new town, I always kind of wander by the waterfront. And I'm a fisherman and a boater, and I know the prices of all these boats. And it's like, I don't understand. There are just hundreds and hundreds of vessels in a marina that That's $ 4 million. That's $ 2 million. That's half a million. That's $ 800. I know the prices of these things. I'm like, where is all this money coming from? The books kind of lay out, but the fascinating thing is this has been out there in plain view for decades. How did we all miss this?

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Speaker 4: It's so funny. I mean, we joked that one of the sections of the book should be called Yahtzee. It's sort of like, you know, you look at who owns yachts and you see it, you know, we actually scaled up your intuition, which, you know, I wouldn't bet against Barry in the markets. And I think confirmation bias, maybe you're just right. We bought yacht registration data. And so you could actually, unlike in the tax data where, you know, our large scale research was done. you can actually see the names of the people in the yacht registration data.

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Speaker 2: The tax data is all anonymized. So you get the specifics, but not the person.

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Speaker 4: You get like, okay, this business is in auto dealer.

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Speaker 1: This is HVAC.

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Speaker 4: You know, this is a dentist, that kind of thing. You get rough geography, right? Like sort of county or area zip code.

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Speaker 1: Exactly.

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Speaker 4: But you don't, you know, to protect people's privacy, you don't know who they are and we're not allowed to, it's illegal to do that. So we got other data for the book to kind of, Figure out we sort of knew where to look from the research. Let's go find some of them and meet them. And the yacht data is how we found people like Nancy Mueller, who made yacht money, you know, building a business selling ready to bake frozen quiche in big box stores.

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Speaker 1: That's how we found people.

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Speaker 4: Dick portillo who made yacht money starting from like a single hot dog stand in suburban chicago 50 years ago uh to have the largest private you know red fast casual restaurant business doing hot dogs italian beef chocolate cake shakes and the like sold it to berkshire partners for a billion dollars and his yacht was called top dog.

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Speaker 2: Amazing really amazing um So I always find the idea of who is wealthy fascinating. And anytime I write about it, it always seems to generate a lot of clicks. But I love the way you guys frame this in terms of earn or own. And so the question is, how important is business ownership versus a high and rising income from labor to getting into the top 1% or top 0.1%.

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Speaker 5: If you look at top incomes, for example, take the top decile and then ask what share of people's income is coming from labor income, like from a normal salary job or from business ownership or other capital income, you know, the typical person in the 90th percentile, um, is getting salaries. But as you go up, the graph converges and crosses so that in the top 0.1%, most of the top income is coming from business income. And the main typical way you get wealthy in the country is by owning something rather than earning.

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Speaker 1: There's a saying.

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Speaker 5: That salaries is for suckers.

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Speaker 1: That's a tax thing.

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Speaker 5: It's like better to own something from a tax point of view, but it's also how a lot of people are wealthy in America.

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Speaker 2: So you mentioned the pass-through. My firm is a pass-through. Most of the people I know who own businesses are set up as pass-throughs. I'm curious, give us a little bit of the background of when that changed, at least in the tax code, and how that manifests itself on entrepreneurs in the economy.

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Speaker 4: Yeah, so pass-through businesses don't pay tax at the firm level. So the tax rates that are relevant for them are the individual owner's taxes. So the income flows through, that's why I say pass-through, to the owners, and then it's taxed the individual level. Until the 1986 tax reform, which was a bipartisan reform. Reagan was president. Democrats were in charge of Congress, brought the personal income tax rate down below the corporate tax rate for the first time in the history of the tax code. It didn't make sense to be a pass-through because it was tax disadvantaged. But all of a sudden, it was cheaper to be a pass-through if you were a business. And over time, as individual tax rates have come down, say the Bush tax cuts brought them down, their carve-outs from the payroll tax are passed through business owners. The 2017 tax reform introduced a new carve-out for certain categories of pass-throughs. They get a 20% deduction. And so it's been, it's like a great deal to be a business owner. And it's very important to be a business owner as a pass-through for most of these businesses because you get better tax treatment. And that's led to this massive growth in the pass-through sector. More than half of business income is pass-through business income, even though all the public companies are C corporations, traditional corporations. Nearly half of employment is in pass-through businesses and nearly every business in the country because pretty much all the small businesses are pass-throughs.

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Speaker 2: And let me annotate. Your answer, I think it was the 2017 or 2018 tax cuts and job acts created an opportunity. So that was a Republican-led tax cut, but it created an opportunity for Democratic-led high-tax states to ask the IRS, hey, we want to embrace TCJA. And we want to allow these pass-through entities to pay state tax at the corporate level, which means that if you own a business, your business is paying the state tax. So you're not paying federal tax on the income you're taking to pay the state tax. It's yet another tax advantage for business ownership. And kind of surprisingly, New York State Ask the IRS, California, Massachusetts, New Jersey, Connecticut, all these high tax states. And to everybody's surprise, the IRS said, sure, go ahead and do that. If you want to essentially add on a tax cut to that, we're fine with that. And so it's even that much advantaged over. But I knew how useful pass-throughs were. I had no idea how significant the impact was on the overall economy, you guys essentially give that aspect of the 1986 Tax Reform Act credit for unleashing a whole new wave of business formation and entrepreneurial activity. Explain that a bit.

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Speaker 1: I mean, just some stats to give some context on it.

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Speaker 5: If you take one of the most famous graphs in economics, the share of the top 1% income and hold fixed how important pass-through business income is in 1985 before that reform and let it follow through, you basically get half of the rise in the top 1%. If you look at wealth growth, two-thirds of the wealth growth from 1989 to the most recent data in the SCF are coming from private business of the top 0.1%. And so this is really quite central from an accounting point of view for where the wealth has grown and where top incomes have come from.

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Speaker 2: Really, really interesting. So I said this was an exercise in confirmation bias. Let me try and disconfirm the book and argue against what I think we all kind of believe. The book almost makes entrepreneurship sound easy. Find an unglamorous business, develop an expertise in it, scale it up, but maintain your ownership the whole time. The question is, how much survivorship bias is in here? Because you obviously, when you're looking at wealthy people, you're looking at the businesses that succeeded. What percentage of these businesses fail? What doesn't make it?

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Speaker 4: So absolutely. I mean, you know, anytime we talk about the top 1%, right, or the Forbes 400, we're looking at that same survivorship bias question, right? And so one thing we're able to do in our now like sort of the large scale admin data research is you can look at all new businesses formed since 2000. So that's like 10 million founding events. And we can follow those people over time, whether the businesses succeed or fail and say, how much better offer those founders on average compared to very similar workers who didn't become business owners? The answer is on average about 10% higher incomes for them, not even including the unrealized say capital gain from selling the business that they built. And that includes a bunch of failures. And that's looking at sort of the income flows for those people that they're getting from those businesses. How do I interpret that? Well, even if a business fails, person learning something, and if they're not doing anything illegal, They have an opportunity to either reenter the labor market or start something new where they solve some of the problems with the first venture. So we see about 20% of our founders are serial founders, not in terms of inventing boxes of cereal, but they found multiple times. And that means maybe the second or third business they start is really the one that makes them the yacht money. And so I think it's kind of an interesting, it's definitely not the case that it's automatic. or it's set it and forget it, the way these entrepreneurs who are success stories get to the top. But I think it's also surprising to us that while they are taking more risk, on average, it seems to be a pretty good deal for these people.

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Speaker 2: I have a friend in Switzerland, born and raised, lived in the US for a few years, went back. And he has repeatedly said, failure in Europe is a black market. It's something that sometimes takes generations to live down. Failure in the U.S. is like a checkbox. Okay, fail, try again. And his theory is the genius of American business and entrepreneurship is that failure is not a scarlet letter. It's part of the process. How accurate is that assessment from across the pond?

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Speaker 4: That really resonates to me just based on kind of looking at this data. I also teach MBA students who do entrepreneurship and take entrepreneurial ventures and follow them, the careers I've been doing for a decade. And the ones that come from overseas, failure definitely, you have to explain to your family what you were doing, that hole on your resume. Why weren't you working for the blue chip company? Whereas here, it's like go out and do something is very much in the water. And I mean, you know, I would love to figure out a way to show that systematically, but I think it quite resonates.

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Speaker 2: The data point related to that that I've been tracking for years is new company formation at record highs and every year since the pandemic. It's kind of amazing. But you mentioned the blue chip company. I think those folks would be surprised to know that the richest person in most communities isn't necessarily the CEO of a public company. It's the people who own a local car dealership or a medical or dental practice or an HVAC company or anything like that. What is the wealth building process like for entrepreneurs versus the folks who are earning their wealth through stocks, options, and venture capital?

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Speaker 5: And so one thing that's quite different than the venture capital kind of Silicon Valley move fast and break things model is that That seems very fast, whereas the typical private business owner that we're talking about rolls up their sleeves, has a lot of hard work, and it takes decades.

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Speaker 1: These are not quick hits on a quick hit app.

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Speaker 5: Most of the people that we talk to, they're typical ones in their 60s because they've worked and gained domain expertise over a series of decades. That's one distinction that it's not a get-rich-quick scheme.

00:18:52
Speaker 2: Get rich slowly. Yeah.

00:18:54
Speaker 4: Move slow and make things.

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Speaker 2: Move slow and make things, not move fast and break things. I really like that. So let's talk a little bit beyond wealth. You guys really say these business owners aren't merely wealthy. They become important political players in their towns. How does this economic power translate to the ability to influence policy at local, state, and federal levels.

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Speaker 4: So we like to say there's an ever millionaire in every congressional district. So unlike Silicon Valley and Wall Street, which are very specific geographies, there's like a car dealer in almost every congressional district. These people have a lot of employees. They pay a lot of sales tax. They're visible in the local community as an example. But the local business owner is an archetype that's broader than that. And as a result, they have a lot of clout. They're very popular. They have higher approval than the military, Supreme Court, the Congress, the small business, quote unquote. And so they end up running for office quite often, not just lobbying. There's a frequent... overrepresentation at the federal, state, and local level with office holders being private business owners. So we found about a quarter members of Congress are private business owners. And if you want to include law firm partners, that number could get up to like 40, 50% almost. State and local office, because these are part-time jobs, low salary jobs. Mayors are like even more overrepresented by business owners. And some of that's good. They know how to get things done. They know how to run large organizations. And some of that's, well, they have very specific priorities and they go into office. And when you see policy going in a certain direction, they can be the key to understanding why it's going in that direction.

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Speaker 2: Really interesting. So we briefly talked about survivorship bias. I'm curious because the pandemic really revealed how many companies were marginal and got put out of business and If you were fortunate enough to set up an HVAC company or an auto dealership, you probably did pretty well. If you set up a small retail shop or local newspaper and things like that, there have been huge, huge swaths of the economy that have been completely disrupted by the big players in technology. So whether it's Amazon and retail companies, Craigslist and media, even Uber and small taxi companies, a lot of these businesses have gone belly up. So one of the questions is, hey, how much just serendipity and dumb luck is involved in this? And how much of this is insight in identifying a business that may or may not be vulnerable?

00:21:54
Speaker 4: So the long-term goal is to be an owner-operator of a successful business, one that is probably in an industry that's like there's some natural growth to can be quite helpful. Um, some of our, you know, successful entrepreneurs that we interviewed, uh, they encountered these kinds of headwinds and they pivoted. Um, so we have a story of somebody who was running, doing pretty well running tanning salons and, uh, you know, consumer tastes moved against that in a hard way as the safety, as the health concerns like became more salient. And she took what she had accumulated her expertise running this kind of sort of consumer beauty service business, which had a lot of transportable skills into waxing. So starting like a waxing salon business, which didn't have those same health issues, but I think allowed her to kind of move those talents. And so that was kind of the second act of her very successful career as a business owner. And so it's kind of like paying attention to and being willing to pivot in response to these industry or consumer trends that are changing. That's like a pretty important skill that we see. And I think that's one reason also why it takes a while to build these successful businesses, because you kind of like navigating, finding your opening, finding your spot. And it doesn't get there automatically. And often it requires some luck to find that thing that's opening up and then you jump on it.

00:23:22
Speaker 2: All right. Last question. You guys teach college students, MBA students, et cetera. I want to lay out a little bit of a challenge for you. Take all of your data and give it to one of those 25-year-old MBA students and tell them, here's the data. Show me the most realistic path to becoming a multimillionaire in America today. What do you think they're going to come back to you? What should they do? What should they not do?

00:23:52
Speaker 5: So we haven't done that exact exercise, and that's something that I think is pretty interesting. One opportunity, I think, is there's this big– boom of business owners who, like I said, are in their 60s or 70s, many of them want to retire. And for a lot of these people, they might not have kids who want to take it over or want to give it to their kids. And so I think there's a lot that someone could do trying to get some expertise, knowing how to run something like a car dealership or a gas station or, you know, you name the type of company that and work in it for a few years and then try to put themselves in a position to own the thing when the owner wants to retire. They can set up things like seller financing where they say, all right, I believe in this business. I'll give you a loan in exchange for some future profits. And if someone's willing to do that, that kind of signals that the thing is worth something.

00:24:49
Speaker 2: So to wrap up, if you want to become part of the wealthy cohort, the top, let's call it 4%, of Americans who are worth $ 5 million or more, sure, a nice income will help a little bit. But if you really want to get there, you need to own equity, not just earn from equity. I'm Barry Ritholtz. You're listening to Bloomberg's At The Money.

00:25:18
Speaker 3: Baby, baby, you're a rich man. Baby, you're a rich man. Baby, you're a rich man too.