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got there. But the origin story of this book is something I wanted to ask you about because it also sits squarely within Oblott's territory when we talk about I guess, what a mess government data and technology tends to be. Because this book started with a project, a commission by the Treasury Department to try to sift through IRS data to figure out who these people actually were and how many of them there are. Talk to us about what you found when you started that project. 00:05:44 Speaker 4: Yes. So we started more than a decade ago, commissioned by the Treasury to go into the bowels of the Treasury and work with tax data to try and link all the businesses to their owners and workers because they didn't have the ability to do that. And they needed it to do tax policy to sort of think about what if we change the tax code, how much tax these pass-through businesses pay. They didn't have the capacity to do that because the data weren't connected. And so that was the original kind of sin of our project. That was the foundation of our project was to sort of build this data that as we continued to expand it, add years, add different types of layers on it by looking at just the entrepreneurs, for instance, we could start to see, oh, there's actually a picture of income, wealth, entrepreneurship, prosperity in the American economy that is very different than the picture that we were getting from the media, the picture we were getting from the capital book and so on. And so that's sort of the beginning was that kind of nerdy tax data project, the computers, the databases, the XML and so on, which we can talk more about, but that's where we started. 00:06:49 Speaker 3: Well, I wanted to ask about the databases, actually, because it just sounded like a nightmare the way you described it. And then there's this funny moment in the book where you basically like randomly find the guy who kind of built these systems and understood them and was able to help you wrap your head around them. How difficult was this? 00:07:05 Speaker 5: I mean, so the underlying data are basically everything on a tax form. So, you know, you can have information about the business. You can have investors in the business who get money going to them. They're not made to be linked. And many of them aren't electronically filed. 00:07:23 Speaker 1: When you say they're not made to be linked, what's not made? 00:07:25 Speaker 3: They're separate databases. 00:07:26 Speaker 5: So they're just different forms. So when you say Joe and Tracy had an S Corp and you own it 50-50, you can file the business's form and then you have to file an investor form that says, all right, half the profits are going to Joe, half the profits are going to Tracy. And the way they set up the identifiers is aren't made where you're supposed to be able to add up all the things from investors, and that should add up everything from the business. So the story about how we figured out how to do this, we're going through

old code books, like things were called different variable names. And Eric, I don't know if you want to tell the story about going to a part of Utah. 00:08:07 Speaker 4: Yeah, so I'm giving a talk at Utah State. And I knew that one of the guys who designed the XML system that when people electronically file their tax returns, it's sort of like the formula for converting those tax returns into rows and columns that then get processed, lived on the way from the airport to the lecture I was giving. So I was like, can I come and just ask you some questions? And so I met him for lunch. 00:08:35 Speaker 1: We had burgers. 00:08:35 Speaker 3: What were you thinking? 00:08:36 Speaker 4: I was imagining like in the Matrix, you know, like you go see the Oracle and it's like this old lady, you know, who's like the spoon is bending, you know. 00:08:43 Speaker 1: I was imagining like some guy who like like kind of a hermit. It's like someone knocking on his door, it's like, why are you here? What do you want? And he's like, that's not me. And then finally after, no, but keep going. 00:08:53 Speaker 4: He was a super reasonable, he was kind of wearing like a flannel shirt as everybody in Utah seems to do. He wanted to have a beer at lunch and I was happy to join him. And I had my like list of 25 questions that are like very intricate questions about the structure of this database. We had to rearrange columns in order to create the links to to match the business forms to the individuals. And we didn't know what any of these columns were necessarily. 00:09:17 Speaker 1: What year is this, by the way? This is like. 00:09:19 Speaker 2: 2014, 15. 00:09:19 Speaker 1: Okay, great. 00:09:21 Speaker 4: So yeah, so you can't ask Claude to read the manual and read the code. There's no way to do that. There's no documentation. There's just this knowledge in people's brains that you have to find to try and do this link. And there were other people who kind of knew some of these details, but we couldn't really get to the bottom of it until... having a burger and beer with the architect. 00:09:43 Speaker 1: It's sort of a diversion, but I feel like I've read so many NBER working papers, which include the line, we exploit a novel data set. How much of economics is finding a novel data set? We think of it as like, oh, maybe we're going to apply some econometrics or theory or whatever. How much are just, as professional economists, is it about finding that data? 00:10:07 Speaker 5: I think it's an important part, but it's also, you need to ask an important question. And if you are thinking about how do people get rich and you only see a small sliver of how it actually works, and then suddenly you can say, You know, there's 1,000 private business owners that have $ 25 million for every large public company CEO. Like, we've missed all of these people. And now, for the first time, you can trace back, like, where did these people come from? 00:10:32 Speaker 2: Like, what are they doing? How did they do it? 00:10:33 Speaker 5: That, I think, opens it up and opens up a lot of work, where I think you're right. Like, there's one of Eric's advisors, Andre Schleifer, teaches a class at Harvard, and he basically– gives the college students at the assignment, like, find me a cool data set. And like, that's how you write the paper. It's like, show me something I haven't seen before. So there's certainly something to find a novel thing to get a hook on something we care about. Yeah. 00:10:57 Speaker 4: But figuring out the question to ask with that data is kind of the trick. Like the data is sitting there like, oh, we can use this to understand inequality. 00:11:03 Speaker 2: Okay. 00:11:04 Speaker 5: Okay. 00:11:05 Speaker 1: Maybe this is like jumping forward, but just finally relieve me. What is pass-through made? Like, I mean, finally, like, I'm just going to ask it. When we talk about like, oh, this center really wants to preserve or expand a pass-through induction, what are we talking about here? 00:11:20 Speaker 5: So pass-through businesses are... different than traditional corporations. So if you look at like a typical public company like GM, they're a C corporation. They face the corporate tax. So when they make profits, they have to pay the corporate tax. And then if they want to send money to individual investors, they have to pay dividends. Pass-throughs are a different part of the tax code where you don't have to face the corporate tax, just the profits and losses go directly to the owners. And they weren't that big of a deal in the 80s. The lion's share of profits and activity were in traditional corporations. And then after Reagan cut taxes in 1986 on individuals lower than corporations, that suddenly became the most attractive way. 00:12:04 Speaker 2: To organize yourself. 00:12:05 Speaker 5: And so we've seen this huge boom in pass-through entities where that's the vast majority of businesses in America and like half of profits. 00:12:12 Speaker 3: So, okay, once you figured out the IRS code and got the, I guess, IRS servers that seem to be run by hamsters spinning on wheels to actually work, what were your findings about wealth in America? 00:12:24 Speaker 4: So this income is among the most concentrated. So pass-through business income, 70% of every dollar pass-through business income goes to the top 1%. And if you look at the rise of income inequality, so like the famous graph, top 1% share of income from Piketty and Saez going back to the 1980s, more than half of the growth from that period of time to the 2021 is coming in the form of pass-through business income. So you want to understand what's driving income inequality and wealth inequality, because it's sort of a parallel story there. You really have to understand this pass-through business sector. What is the nature of this activity? We knew it was pass-through business income. We didn't really know if this is like Monopoly Man, big business, that you're

just passively collecting the income, or what we turned out to find, it was sort of these mid-market regional businesses of which there were just millions of them across the country. And that was kind of like the second huge finding about you know, who these pass-through business owners were and what they're doing. Owen, you want to tell them, like, our mnemonic from reading our kids, like, little books? 00:13:30 Speaker 2: Yeah, so I have three young kids. Eric has one young kid. 00:13:32 Speaker 5: And we're half-jokingly thinking about writing a kid's book of the ABCs of getting rich. 00:13:38 Speaker 2: And we just go through and have a fun fact on each of them. 00:13:41 Speaker 5: And so A is for auto dealer, B is for beverage distribution business owner, and then C is for contractor owner. 00:13:47 Speaker 2: D is dentist. You know, we could go through. We actually did it. We haven't made the book. 00:13:50 Speaker 1: You got to do it. Can I just say, my son is obsessed with money. And finally, no, he's like raised. 00:13:56 Speaker 2: Shocking. 00:13:56 Speaker 3: Where does he get it? 00:13:57 Speaker 4: I don't know where. 00:13:58 Speaker 1: No, it's like, he's always scheming. So he would love this book. So please write it. 00:14:03 Speaker 2: Okay. 00:14:03 Speaker 4: P is for podcaster. 00:14:04 Speaker 3: Oh, yeah. 00:14:22 Speaker 5: All right. 00:14:22 Speaker 3: 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. 00:14:50 Speaker 5: So. 00:14:50 Speaker 4: 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. It 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. 00:15:10 Speaker 2: On private jets. On jets. They rented. 00:15:14 Speaker 4: Versailles, not for the wedding, but just for. 00:15:16 Speaker 1: Like- What year are we talking about here? 00:15:20 Speaker 2: 23. 23, 23, yeah. Okay, 24, yeah. 00:15:23 Speaker 4: This was 2023, 2024, a few years ago. And it was all over social media. 00:15:27 Speaker 1: I remember this. 00:15:28 Speaker 4: 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. And 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 zoom out and look at the industries that generate the most pass-through business income, in the top 0.1%, the auto dealers were the number one bucket, which we were like, okay, this is not the pickety story of billionaire tech or finance. This is something different. What are these car dealers doing 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. 00:16:43 Speaker 1: I love that. 00:16:44 Speaker 3: Looking at yacht registries to find rich people. It makes sense, but I'm guessing not many people have done it before. Yeah. 00:16:50 Speaker 1: I'm curious, like from a pure like economics perspective, when we think about, let's say someone's salary, it's like, okay, here's 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? 00:17:37 Speaker 2: So that's a great question. 00:17:39 Speaker 5: 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 car 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. 00:18:24 Speaker 3: Sorry. 00:18:25 Speaker 4: And. 00:18:26 Speaker 5: 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 Utah Jazz. And so

that is like, you know, the good story. He developed some skill. 00:18:41 Speaker 2: He really was. 00:18:41 Speaker 1: Actually, on that last point, can you clarify? OK, 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, he goes, they go from 961 to one or whatever it is. 00:19:04 Speaker 2: Yeah. 00:19:04 Speaker 5: So I think it's, you know, when you're dealing with customers being really responsive, understanding what they need and just you know, being hardworking and diligent and delivering and having a reputation for, okay, if I have some need, I'm going to go to this guy. 00:19:19 Speaker 2: And it grew over time. 00:19:20 Speaker 5: That's one, you know, 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's the good case. But the more troublesome case where you have more regulatory capture are other auto dealers who are quite protected. 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. 00:20:01 Speaker 2: So over. 00:20:02 Speaker 5: 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. 00:20:21 Speaker 2: And so they had all these extra dealers. And why do they have them? 00:20:25 Speaker 5: 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 what the market would pay them otherwise. Yeah. 00:20:58 Speaker 4: They have a local monopoly, sort of like 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, you know, the warranty repair. the financing is a big source of profits, I think for the dealers. And it's like, well, you know, are you going to buy the, you can get the loan at the dealer. You're going to go to a bank separately when you're buying the car there on the lot. So this like first mover advantage to sell all these ancillary services. And it's a huge part of like 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. 00:21:56 Speaker 3: 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. 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. 00:22:23 Speaker 4: We're very amused by the beer distributor. So one of the things for folks that are listening, if you're like walking, like I walked from my home to the office and passed 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. 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 or 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 distributors 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. 00:23:13 Speaker 3: Um, and you know, the idea was you didn't want the big brewers to dominate distribution as well as the actual selling of the product. 00:23:20 Speaker 4: That's right. And it's sort of emerged post prohibition as this like sort of system let's avoid the system, the situation where, um, 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. So they show up within the jet data a lot. And there was this like conference in San Antonio. And the mayor called the lobbyists who organized 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. 00:23:53 Speaker 1: You mentioned a disagreement or a different interpretation than capital picketing and size, et cetera. What is the essence of the conclusions or the things that you've discovered today? 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? 00:24:21 Speaker 4: 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. 00:24:33 Speaker 1: Because that book, it's a really good read. 00:24:34 Speaker 3: I'm just going to reiterate that. 00:24:36 Speaker 4: So it's like, we're going to have, you know, that book is like the top 1% 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, 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. 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 like. 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, there's good, bad and ugly of the humans there. But that's kind of the distinction I think that we draw. 00:25:44 Speaker 3: Since you talk to a lot of these people, I have a sort of anthropological question, but do they see themselves as wealthy? 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 1%? 00:26:08 Speaker 5: 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. 00:26:19 Speaker 2: And he started, he grew up in the projects. 00:26:22 Speaker 5: 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? No, you can actually sell hot dogs to super competitive industry. 00:26:48 Speaker 2: And then is he rich? Well, he has a really big penthouse. 00:26:52 Speaker 5: He's got a yacht called Top Dog, which is just a great name for the yacht. And so it depends on when you're talking to him. I think when you find him in his 30s washing stuff by hand, he does not feel rich. 00:27:04 Speaker 2: But when he's got a yacht and a. 00:27:07 Speaker 5: Huge IPO that they couldn't send him a check because he's 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 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. 00:27:27 Speaker 2: Oh, yeah, the quiche lady. 00:27:28 Speaker 5: And she, you know, it was pretty tenuous for a long time before she got some big contracts to go through. And so, you know, I don't think she felt... that wealthy from her business. It seemed like it was losing money until it really wasn't. 00:27:41 Speaker 1: This is maybe more of a sociological question than an economics question, but I think it relates to who feels rich and who doesn't. When I think about coastal rich, and by that I mean San Francisco or New York City rich, I often think about heads of really gigantic... heavily bureaucratic, layered hierarchical organizations. I imagine someone like Jamie Dimon or the CEO, there are numerous layers. A, they're often very educated, and there are also going to be just 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, etc., 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, 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 is sort of like the coastal rich do. 00:29:16 Speaker 5: Yeah. 00:29:16 Speaker 4: 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. There was a bit of a marine ethic that he brought to running this business. He was there for opening. He was very detail-oriented. 00:29:33 Speaker 2: He had no investors. 00:29:34 Speaker 4: He owned all the real estate. He tried to take no debt, reinvesting every dollar. He had kids, but it was pretty clear when he was moving into his 80s, this is not a family business. This is Dick's business. And there's kind of a relentlessness to that character that I think we see in many of the stories. The first generation founders look like that. 00:29:54 Speaker 2: Yeah. 00:29:55 Speaker 3: One thing that stood out to me is all of these people don't seem to have hobbies. 00:29:59 Speaker 2: They hate hobbies. 00:30:00 Speaker 4: Yeah. 00:30:00 Speaker 2: They hate hobbies. 00:30:01 Speaker 4: John Osher is so funny. 00:30:03 Speaker 2: Dr. 00:30:03 Speaker 4: John, he's not a doctor, who started the $ 5 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. He's like, So bored by it, maybe not a great swing. 00:30:20 Speaker 5: I don't know. 00:30:20 Speaker 4: But, um, went back and started this $ 5 toothbrush business in the.com era, which is exactly the kind of company you would think would make you hundreds of millions of dollars during the.com era and selling $ 5 electric toothbrushes. Um, but that's what he did because he's just like, couldn't sit still. I mean, he was a, had a personality clearly because even as a kid, his first business. was um don't tell your son the story his first business so his parents 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. 00:31:02 Speaker 1: To his friends to look at the paintings i would love this. 00:31:06 Speaker 4: Yes that's the best margins of any business he ever started. 00:31:10 Speaker 1: He can't uh He can't listen to this episode. 00:31:15 Speaker 2: I'll stick to the children's book. 00:31:16 Speaker 5: Yeah, yeah. 00:31:17 Speaker 1: Maybe you just. 00:31:18 Speaker 4: Paint still lifes. 00:31:20 Speaker 1: 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? 00:31:31 Speaker 5: 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. 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 government. We want to make sure So there is a bit of regulatory might, and that's really the case more for doctors, too. 00:32:39 Speaker 4: Yeah, the doctors showed up in one of our early statistical breakdowns. 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 and the top 1%? 00:32:50 Speaker 1: Doctors' offices was number one. 00:32:51 Speaker 4: So this is like their 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. 00:33:15 Speaker 2: And they had just a ton of them. 00:33:16 Speaker 1: 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 a hundred thousand dollars into this film. 00:33:30 Speaker 4: They are, I think, sitting on pools of cash, and maybe they don't have so many ideas of what to do with it, and so they make for maybe easy targets. And because it's a big pool of cash, you know, there's a lot of fishing to be done in that pool. 00:34:01 Speaker 3: So speaking of dentists and doctors, this reminds me, you have a working example in the book showing how the S-Corp 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-Corp 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. 00:34:39 Speaker 4: Yeah, so we are taxing salaries at a different rate than taxing business income. 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, you know, 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. 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 the 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%. 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. 00:36:20 Speaker 3: What's the thinking behind this? We just want lots of small businesses to be created. And so here are some tax benefits. 00:36:27 Speaker 4: 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. 00:36:34 Speaker 3: Yeah. 00:36:35 Speaker 4: 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? 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 pass-through business owners. 00:37:11 Speaker 1: Yeah, this is always like my impression is like, you know, pick a state, Iowa or Ohio. And it's like, you know, I get some politician who's worth a hundred million dollars, but I, and they often tend to do very well. And they like position themselves as like, you know, popular among the working class voters and, 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 is 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. So, hey, 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, 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. And that third part I'm really curious about, is that real? Or in your research, like if there were the political will to raise taxes, are there straightforward ways to do it? 00:38:37 Speaker 5: Yeah, so it's certainly real. I mean, we could start with the most recent. So first of all, you asked about Iowa and Ohio. So Ohio, one of the senators is Bernie Moreno, who's an auto dealer. So that's a great one. And he had a proposal with Elizabeth Warren to shore up Social Security, how do you want to do it? 00:38:55 Speaker 2: You put it on the payroll of all these salaried workers. 00:38:59 Speaker 5: There's no mention of these very wealthy business owners, like it's all salaries. So the anesthesiologist that you were talking about before, one of them is getting off, you know, scot-free and the other one is paying a lot more. So I think That's one very recent example. 00:39:16 Speaker 2: Now, it's interesting. 00:39:17 Speaker 5: We've been talking to folks on the Hill about, you know, 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 Business. 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. 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. 00:39:56 Speaker 2: And that, to me, seems like one path. 00:39:58 Speaker 1: When you say limit them by income, explain that for us. 00:40:01 Speaker 5: So, you know, 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. 00:40:19 Speaker 2: They are doing very well. You can't plausibly call them small. 00:40:22 Speaker 3: 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. 00:40:40 Speaker 4: 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. 00:40:50 Speaker 1: Company in Mississippi. 00:40:53 Speaker 4: And I teach private equity to MBA students and I talk about these unglamorous deals. 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 said, 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 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. 00:42:03 Speaker 1: Yeah. 00:42:04 Speaker 4: And there's the end point. 00:42:05 Speaker 1: 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 whatever. 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? 00:42:43 Speaker 4: 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, you know, people who want to run it from within those businesses. Some of them are too small to attract private equity interest. And so, yeah, so I see students first, it

was like a few students that knew about the search fund thing. I started in 2014 teaching and I was talking about search funds. 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. And 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. 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. 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. 00:44:48 Speaker 3: 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. 00:45:07 Speaker 5: Yeah. So one of the cool data things, you know, 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, you know, how many people are going to start businesses if they're poor, if they grow up in Salt Lake City versus Mississippi. 00:45:34 Speaker 2: So Salt Lake, the probability you start a star business. 00:45:37 Speaker 5: 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. There's the nickname, the Silicon Slopes, 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. 00:46:08 Speaker 2: So that's, that's one thing. 00:46:09 Speaker 5: 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, you know, your son is not inheriting the podcast, but just here's all about money all the time. 00:46:25 Speaker 2: Yeah. 00:46:25 Speaker 1: Round two, fourth generation podcast. 00:46:28 Speaker 4: Yeah. 00:46:28 Speaker 2: You know, you have to start the escort first. 00:46:31 Speaker 1: You know, I'm sort of curious, it's not 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. 00:46:45 Speaker 2: We don't. 00:46:46 Speaker 1: 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. 00:47:16 Speaker 4: 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. 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. 00:47:43 Speaker 1: Do people get SBA loans? Is there publicly subsidized leverage for these buyers? 00:47:49 Speaker 4: It is possible. Most of the debt that's used in those deals is coming from banks. I mean, they're established businesses with a decent track record, most of the case. So you can really You can leverage that. They're not leveraging like 80% 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. 00:48:12 Speaker 3: Just going back to the pickety part of this conversation and the idea of income inequality, what do we see when we look at the S-Corp data in terms of how much is actually accruing to owners versus workers? 00:48:25 Speaker 4: Yeah, 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 forms. There's a lot of economic activity coming in pass-through form. 00:48:53 Speaker 2: The pie is growing. 00:48:55 Speaker 4: The share that the owners are capturing of the pie has gone from like a third or 40% to like 50%. They're capturing a larger and larger slice. 00:49:03 Speaker 3: Can I just ask, what's your explanation for that? 00:49:06 Speaker 4: 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, you know. 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 So as demand grows for that stuff, like it's, 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 like competitive, maybe there's like a mixed, you know, productivity and invention and stuff, but I think that's an important part of it. 00:49:58 Speaker 2: Yeah. 00:49:59 Speaker 5: So, you know, we tell different examples, like we have a colleague, Kevin Murphy, who's one of my favorite economists. And he just, his first language is economics, not English. He can just go up to the board. Just as a quick aside, I used to, as a first year faculty member, I went and sat in his 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 and have the most It's coherent and beautiful, and he. 00:50:28 Speaker 2: Just does it. 00:50:28 Speaker 1: That's cool. 00:50:29 Speaker 5: So anyway, so Kevin, he does some econ consulting. 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, you know, 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 involved. 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. 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 another example is 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. 00:51:33 Speaker 4: 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, you know, if we have more money at the end of the day, I'm going to reinvest in the business or I'm going to take it. And that's kind of like the mentality of this founder mindset. generation, especially. This chemical importer, exporter called Chem Impacts, you know, really like sexy name. 00:52:01 Speaker 3: There are a lot of unsexy names in this book, I must say. 00:52:04 Speaker 1: This is right. Glamorous, right. 00:52:05 Speaker 4: 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, they're 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, you know, through their family, they're able to connect to and hire. And so they're using the same kind of ways to offset sort of labor scarcity or, you know, to reduce labor demand, I think. And that then means that they can be more productive. But the workers are not, you know. capturing those proceeds. 00:52:47 Speaker 2: But let me just give you some numbers because they really are striking. 00:52:49 Speaker 5: 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. 00:53:06 Speaker 2: So there's 18K per worker of growth. 00:53:09 Speaker 5: Owners got 15 of that and workers got the rest. So like the numbers are really... striking in terms of how big owner you know that's part of why um 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 You know, there's so many people with huge boats and you're like, what are these people doing? 00:53:34 Speaker 2: And it's pest control. 00:53:35 Speaker 5: 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? 00:53:45 Speaker 2: Like, what did they do? 00:53:47 Speaker 5: 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. 00:53:57 Speaker 3: Invented post-its. Does anyone get that reference? 00:54:01 Speaker 1: Oh, what's that from? 00:54:03 Speaker 3: Romy and Michelle's high school reunion. 00:54:05 Speaker 5: Yes, yes. 00:54:06 Speaker 2: I knew this. Yeah. All right. 00:54:08 Speaker 3: Eric and Owen, we're going to have to leave it there. But thank you so much for coming on All Plots. The book is The Everywhere Millionaire, and it is very, very good. So thank you so much. 00:54:17 Speaker 1: Thanks so much for having us. 00:54:19 Speaker 3: Yeah, thanks. 00:54:19 Speaker 2: It was a lot of fun. 00:54:20 Speaker 1: Thank you so much. 00:54:35 Speaker 3: 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 field of millionaires across America is much more varied than that. 00:55:07 Speaker 1: No, I couldn't agree more. I think this is such an important conversation and it's so interesting. I do think there's one part that I think is fairly understood. People know 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 intuition that car owners are often influential, particularly in the Republican side of the aisle, et cetera. But I think like, okay, 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 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, you know, 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. 00:56:39 Speaker 2: Right. 00:56:40 Speaker 3: And it is worth really asking what you're incentivizing through the S-Corp 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. 00:56:53 Speaker 5: Totally. 00:56:54 Speaker 1: And I like the characterization of the tax code as a house. 00:56:58 Speaker 5: Yeah. 00:56:58 Speaker 1: 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, etc., 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. 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. 00:57:39 Speaker 3: I think of the tax code as an amorphous blob that people are always poking with a stick. 00:57:43 Speaker 1: Can I just say something? 00:57:45 Speaker 5: Yeah. No. 00:57:46 Speaker 1: 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, like all like the only 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. 00:58:16 Speaker 3: Poor us. 00:58:17 Speaker 1: Poor us. 00:58:18 Speaker 2: All right. 00:58:18 Speaker 3: Shall we leave it there? 00:58:19 Speaker 2: Let's leave it there. 00:58:20 Speaker 3: This has been another episode of the Odd Thoughts Podcast. I'm Tracy Allaway. You can follow me at Tracy Allaway. 00:58:25 Speaker 1: And I'm Joe Weisenthal. You can follow me at The Stalwart. Check out Erica Nguyen's book, The Everywhere Millionaire. Follow our producers, Carmen Rodriguez at Carmen Armand, Dashiell Bennett at Dashbot, Kale Brooks at Kale Brooks, and Kevin Lozano at Kevin Lloyd Lozano. And for more Odd Lots content, go to Bloomberg.com slash Odd Lots. 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. 00:58:52 Speaker 3: 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. 00:59:29 Speaker 1: Thank you.