Chicago Booth Review Podcast How Some ‘Small Business’ Owners Profit from Politics

Eric Zwick: At least disclosure, but also, I mean, I don't know, if you have a conflict of interest, should you be involved in crafting legislation that immediately benefits your bottom line. Seems like that's a problem, or representative democracy, at least we should have the information more salient than it is.

Hal Weitzman: People with a net worth of at least $5 million are heavily overrepresented in politics. That enables them to bend the law to benefit themselves. Many tend to be business owners, and some have used policymaking to make their companies more profitable. How have they done that, and what should we do about it? Welcome to the Chicago Booth Review Podcast where we bring you groundbreaking academic research in a clear and straightforward way.

I'm Hal Weitzman. And today, I'm talking with Chicago Booth's Eric Zwick about the book he's written with Owen Zidar, The Everywhere Millionaire: Who Is Really Rich in America and How They Got There. This is the second conversation we're having about the book. If you missed last week's episode, it might be useful to start there.

Today, we're looking at how these everywhere millionaires shape our political system. In some cases, what are touted as small businesses turn out to be multibillion-dollar enterprises that manipulate the tax code and other policy tools to reap ever bigger profits. Eric Zwick, welcome back to the Chicago Booth Review Podcast.

Eric Zwick: Glad to be back.

Hal Weitzman: We're here to talk again, because we had so much to talk about. We wanted to be back to talk about your book, The Everywhere Millionaire, written with Owen Zidar, The Everywhere Millionaire: Who Is Really Rich in America and How They Got There. And last time, we talked about the profile of some of these people, but there's a whole other section of your book about what they actually do politically.

And this is very significant, because I guess they're helping to set the policies that are governing their own behavior. So that's why we wanted to have you back. We kind of think of businesses lobbying politicians, maybe just buying politics, buying votes, but the Main Street millionaires that you write about are actually in Congress themselves making the laws. They're overrepresented. Why is that?

Eric Zwick: Yeah. So I think it's a very underappreciated aspect of our political system that we are overrepresented by business owners in federal legislatures. We're also overrepresented at the state and local level by business owners. This is something we discovered through our research and interactions and watching tax policy evolve over the last decade.

We thought it was a story that was super important and interesting, and also cuts across party lines. Why are there so many business owners in these elected offices and not just as lobbyists? Because there's that going on as well. Well, business owners are extremely popular. So in Gallup, the approval rating of 20 institutions across society, I think small business is kind of at the top. It's above the military, I think, in those Gallup ratings.

So they're uniquely popular in American society, and this has, I think, been true for a long time, the mom and pop. It has become more and more expensive over time to run for office, at the federal level especially, but also state and locally, it's expensive. And then when you get into those positions, they don't pay very well.

And so, it's better to be a politician if you have another source of income and wealth, another job that's flexible, that allows you to do it. There's probably some role for talent as well or skill, like business owners are good managers, and running a campaign has a management element to it. They're good salespeople. We know politicians have to be able to sell themselves in soliciting votes.

So probably, there's some skills that translate. So those are a few reasons, but I think the financial aspect of it is probably the one that I settle on the most. The returns to becoming an elected official for some of these folks can be quite high too. They can shape policy to their benefit.

Hal Weitzman: Do you think that's actually driving it?

Eric Zwick: I think what's-

Hal Weitzman: I mean, it may be a nice perk, but is that actually what's getting them into politics in the first place?

Eric Zwick: No. I think there's a mix of reasons people do it, I mean, because it's also sort of late in their careers. It's kind of like, "I've been very successful. I have this big network. I'm frustrated with who's there instead of me." And also, there's an ego element too. These folks, they tend to be quite confident in their abilities.

And so, yeah, they're like, "Why don't I go in and try it?" And they don't have to raise so much money from others to run the campaign and give it a try. And so, some of them are successful. The ones who are good at it are successful. A lot of them fail that run for office as business owners. We've seen many examples. I mean, Bloomberg may be the most famous flameout in terms of the return on investment.

Hal Weitzman: But we are sitting here in Illinois. Our governor is a businessman.

Eric Zwick: So a lot of success stories. And we spent a little bit of time talking about the former speaker of the House in Illinois, Mike Madigan, who is a property tax lawyer, and that was a huge business for him, and it was quite complementary to the political apparatus. As a student of Chicago politics, not a fan of it, but a student of it, I think it's an amazing story of the nexus between business and politics.

Hal Weitzman: Absolutely. Well, yes, that's a very good Chicago-specific type example, right, Mike Madigan. To go back to Congress though for a second, you chronicled the Paycheck Protection Program, the policy that came in during COVID, and how many members of Congress personally stood to benefit from that program. Tell us about that.

Eric Zwick: Yeah. So the Paycheck Protection Program was, during the pandemic, a program that gave forgivable loans to businesses with fewer than 500 employees. Although if you were a franchise owner, you got a little carve-out. You could have more than 500 employees across many franchises as long as they individually.

Hal Weitzman: Clever, and a lot of the everyday millionaires you write about are franchise owners.

Eric Zwick: Yeah. And there's a famous one, I think, from Indiana, Kevin McHern. They call him McCongressman, because he owns so many McDonald's, a beneficiary of many PPP loans, but there are dozens of Congress members who received PPP loans as business owners. And across the OECD, Europe, Japan, et cetera, there were a lot of programs to support employment by giving money to businesses.

The U.S. was an outlier in terms of how generous it was. I don't have the causal link between the representation and the fact that it was so generous in the U.S. versus these other places, but I do think it didn't hurt that a lot of the folks implementing legislation, writing the rules also stood to benefit.

Hal Weitzman: That's fascinating. Has there been a rise, do you know, in businesspeople-politicians, entrepreneur-politicians in other countries as well? Do you know that?

Eric Zwick: We don't have great comparative data across other countries, but there's at least one study that we looked at. I don't know if this is in the book, but looking at, say, where French politicians come from in the legislature, and they're less likely to come from business-owning backgrounds. I'm not really sure we understand why. I think it's a really interesting question.

Why does representation look different across these countries? To what extent the way that you finance campaigns playing a central role? Because that has an immediate policy implication, which is we should just have public financing if we wanted to even the playing field.

Hal Weitzman: Mm-hmm. So we talk about PPP. Are there other kind of high-profile examples of how these-

Eric Zwick: Yes.

Hal Weitzman: ... Main Street millionaires have shaped the laws to their own benefit?

Eric Zwick: Yes. There are many. We spend a lot of time going through them, and we think there's not just federal. There's also state and local. But the federal level, we spend a lot of time as tax experts on the various loopholes in the tax code that seem to benefit pass-through business owners especially, but also closely held business owners that are looking to, say, pass on businesses to heirs in estate transitions.

So the estate tax, how that's evolved to become more generous and to make it easier to pass quite large businesses without any estate tax liability, capital gains taxes, how those have changed over time, pass-through income tax, how that's changed over time. So the tax code is sort of front and center in terms of places where you can see effects of being overrepresented on the rules of the game from individual carve-out provisions.

As part of the 2017 Tax Cuts and Jobs Act, there was going to be a cap on how much you could deduct interest when you borrow to finance your business. There was an exclusion for floor plan financing for auto dealerships. So if you borrow to finance inventories of cars, then you get that full deduction no matter what, and there are three auto dealers on the Ways and Means Committee, which the tax-writing committee of Congress, and we spent some time profiling a few of them in the book.

Hal Weitzman: It's interesting, because, I mean, we're used to weird clauses being put into U.S. bills in order to buy off individuals on Capitol Hill, but typically, they do that for their districts, and that at least is the popular narrative, not for them.

Eric Zwick: Right. Right.

Hal Weitzman: Home benefit seems like crossing a line.

Eric Zwick: We sort of think that this should be more salient. It's not like to say that that other more traditional pork barrel lobbying spending kind of stuff isn't going on, because we have some examples there as well, looking at, say, Wisconsin donations from large businesses that are pass-throughs to Senator Johnson's campaign, who's a Wisconsin senator, who also is a pass-through business owner, plastics.

Yeah. I think at least disclosure, but also, I mean, I don't know, if you have a conflict of interest, should you be involved in crafting legislation that immediately benefits your bottom line. Seems like that's a problem, or representative democracy, at least we should have the information more salient than it is. And we think this kind of stuff is also happening at the state and local level in different ways.

So we look at state and local policy. We look at protections for industry by industry. There's a lot of distribution industries that have state and local protections. So car dealers are a kind of distributor of motor vehicles. They have franchise protections that make it very hard for manufacturers to terminate their contracts.

So they get these little turf-protected monopolies. They're not large regionally, but they're large locally, exclusive rights to sell those types of cars and to do the other services that are naturally kind of complementary to selling cars there. Beverage distributor is another example we spend a lot of time with, because, I mean, I have a taste for beer personally, but I think it's just an amazing history that also overlaps with prohibition and FDR and Smokey and the Bandit.

There's some great stories that come out of it, but the beer distributors also have a lot of protection between manufacturers and the points of sale, like grocery stores, bars. And so, you have to go through the distributor in a lot of places to deliver your beer to market, and they've gotten incredibly rich over the last 20, 30 years.

There have been some waves of consolidation, and we're not clear that this is a super entrepreneurial activity, but it's like a local market power kind of story in that case, and there's a legislative component where they're lobbying for protections or against laws that kind of break that up or allow more entry or direct sales and so on.

Hal Weitzman: Carry the Two is the show that pulls back the curtain to reveal the mathematical and statistical gears that turn the world. Cohosts Katie Witkowski and Ian Martin bring unique perspectives from the fields of mathematics and statistics to convey how mathematical research drives the world around us. With each episode tackling a different topic, subscribe to Carry the Two, part of the award-winning University of Chicago Podcast Network.

Eric, in the first half, we talked about the political power of the stealthy wealthy, the everyday millionaires you write about in your fascinating book. One of the things that I found really eye-opening about your discussion here was small business, and you said in the first half that the public loves small business. You called them the mom-and-pop shops. Right?

Then it turns out that mom-and-pop shops could actually be multibillion-dollar businesses. Depending on how small business is defined, we could include some very large-looking businesses in the definition of small businesses, which then gets them all sorts of support, tax breaks, et cetera. First of all, tell us about that, but I'm also interested in, do you think it's deliberate? Are we deliberately being misled about what a small business is?

Eric Zwick: There's no real formal definition. It varies across program to program, sometimes implemented by different agencies. But when politicians talk about small business, I think they're intentionally vague, because they want an image to come up that's like, "Yeah. The mom-and-pop grocery, hot dog stand, restaurant," et cetera, not the multimillion or billionaire owner of Mars Corporation or a Hobby Lobby, which are these large pass-through businesses that-

Hal Weitzman: So just explain to us, because we talked last time about pass-through, but how could I think of Hobby Lobby or Mars? I mean, Mars is a private company. Is Hobby Lobby private too?

Eric Zwick: Yes.

Hal Weitzman: So is it because they're private, then they structure themselves in the same way that a small other private business might structure themselves in?

Eric Zwick: So it's both private and closely held, I would say, because you would have... I don't want to include... I don't think when we talk about, say, venture capital-backed companies that are private, like startups and so on, I don't think when politicians talk about protecting small business or helping small business leveling the playing field, they have in mind VC-backed startups or biotech startups or something.

But they do have in mind these stores basically or shops or little manufacturers or things like this that are private and closely held, so family business type. But private and closely held doesn't necessarily mean your net worth is low. The value of the business is low. So Mars Corporation is owned, I think, by the Mars family still. It's a multigenerational business at this point, and they are doing billions of dollars of revenue.

And so, the value of the business is enormous. It overlaps with lots of public companies that are smaller, but because of the structure, they're private. And so then, when a politician advocates for a tax cut for pass-throughs, because we want to protect small business, it benefits Mars, and I think that is politically useful.

Hal Weitzman: But are they an anomaly? I mean, they're obviously very large. They're also a long-standing company, but are they an anomaly, or are there actually lots of large companies that are masquerading as small companies?

Eric Zwick: So they're an anomaly in the sense of there aren't that many multibillion-dollar pass-through businesses, but there are a lot of $100 million-plus pass-through businesses, and there, we think, are 3 million owners of businesses in the U.S. with net worth more than $5 million, and their average net worth is around 25 million.

And so, we're talking about when a pass-through-style tax cut is fashioned as helping small business, it might be helping a smaller business, but it also should be thought of as helping a quite rich person most likely-

Hal Weitzman: Who owns that business.

Eric Zwick: ... who owns that smaller business. And it's small compared to Walmart, but in terms of the net worth, the distribution of resources that that benefit is providing. Yeah.

Hal Weitzman: But to go back to my question, are we being deliberately misled, or is it just that there are some anomalies that also are clever enough to fit into this category and therefore take all the benefits?

Eric Zwick: I think nobody is going out of their way to clarify that when they talk about small business, they also mean to include these large businesses or these mid-market businesses that are owned by quite wealthy people, and that's politically useful. And so, deliberately misled or just like a sin of omission.

Hal Weitzman: But I guess that means for those of us who watch the news, if we hear politicians talking about mom-and-pop shops, we should be skeptical.

Eric Zwick: Yeah. You want to get a little more specific, please. Which ones?

Hal Weitzman: Right. Okay. Well, so that makes me think a couple of things. Should the definition of small business be tighter, be clearer, particularly if we're giving them taxpayer-funded handouts and tax breaks and all the rest of it?

Eric Zwick: Yeah. I think we should be more thoughtful about the ultimate beneficiaries of these types of policies. So, again, look through the business to the owners and say, "Do we want to give a $10 million loan that's forgivable to a business that didn't end up being that hard hit by the pandemic after a month of lockdowns that has a centimillionaire owner, or maybe should we ask that person to pay it back?"

Hal Weitzman: Okay. And you've done a huge amount of work on that 2017 tax reform, and we've talked about the PPP, the COVID policy. So there's been a lot of stuff about how that... Can I say PP policy? No, I can't really. The PP program, let's put it that way, was badly done and gave money to people who shouldn't have had it and money went missing.

What would be a different way to have done that that would take account of what you just talked about, that these aren't really small businesses, many of them, and they would have survived anyway and they would have been okay, maybe have large cash piles anyway?

Eric Zwick: One option, I guess, would have been to also require some ownership income or wealth disclosure along the lines, so basically phase it out based on the owner. Another version would have been to say, "You have to pay it back unless the business is really suffering." So it becomes just a low-interest loan as opposed to a grant.

Both of those would have considerably improved, I think, the distributional features of it, and there are arguments against doing that, I guess. But if you're concerned about the distributional features of that program, those are a couple concrete ways that would have been, I think, better and that would have looked a little bit more like how it was pursued in other countries, providing this kind of paycheck, worker support through firm transfers was mostly structured as loans as opposed to grants.

Hal Weitzman: So more generally, so I asked you, does the definition need updating? The question I had after reading your book is, what should we do? What do we do? Is this just an interesting phenomenon that you're describing, or is this something I should be outraged about and I should be holding a sign? In which case, what should the sign be saying?

Eric Zwick: Going to some of these policy areas, we should ask them to pay an appropriate amount of tax, and I don't think giving them tax benefits serves economic growth, or we can talk more about that, but there's a separate track of tax system that I think is basically undermining everybody's faith-

Hal Weitzman: The whole pass-through tax structure?

Eric Zwick: Yeah. Yeah.

Hal Weitzman: So you would get rid of it?

Eric Zwick: Well, I would harmonize it with, say, traditional wage tax, income tax, and maybe that means we can lower the income tax rates across the board, but we shouldn't be having these two tracks, especially when the activity looks kind of similar in a lot of ways. That's one example. The local market power stuff, a lot of barriers to entry across sectors.

And we talked about auto dealers. We talked about beer distributors, but there's also the skilled services. You have occupational licensing restrictions that make it hard for nurses to do things that doctors want to do, and we have restrictions on the number of doctors through the residency programs. These types of entry restrictions-

Hal Weitzman: Yeah. There's a fascinating section in the book about medicine.

Eric Zwick: ... generate tons and tons of these Main Street millionaires that are paid way more than doctors of similar quality and specialization in other countries. It's not clear that we're getting medical outcomes that are better, but it seems like the entry restrictions are probably helping to generate some of those... So those are policy areas that I think, yeah, we could do something about them if we decided that this didn't make sense, and then maybe a third bucket that's a little bit more of the aspirational is, how do we have more of the good entrepreneur types?

So what are the factors that really seem to matter for generating these high-growth entrepreneurs? We talk about more in the first and second part of the book where they come from. Occupational and vocational training, trying to provide support for folks that are at that pivotal point where they could choose to go out on their own versus continue to work within a firm, mentoring services, these kinds of things that supplement.

Traditionally, we've mostly provided subsidized loans for entrepreneurs or businesses, but we don't provide any other support programs or connections or something like that. If those types of experience, network factors really are much more pivotal for successful entrepreneurs, making sure those resources are equally available could move the needle quite a bit.

I'm pretty optimistic about... The cost of starting a business has, I think, gone down just a lot just very recently with the ability to use LLMs to do stuff. You use the AI to do the boring parts of starting a business. And so, you just need to figure out, what's a good idea? What's a good market to enter? Where is there a need? So I'm sort of hoping for this huge burst of entrepreneurship, and maybe there are policy levers that can help support it.

Hal Weitzman: Yeah. Like you say, I mean, it's interesting, because, obviously, when people get there, there's a pattern there, which is they try to prevent other people from getting there. Right?

Eric Zwick: These are the phases of capitalism. Right?

Hal Weitzman: Right. And it does paint a different picture of, again, what small businesses look like and how they behave.

Eric Zwick: Yeah. And I think those areas where there have been those barriers to entry are also areas where probably there hasn't been that much innovation and productivity and improvement. So there are areas where there's maybe a lot of fat that can be trimmed. So the entrepreneur has to figure out how to provide that service using new technology or new opportunities to get around that entry barrier, and that's part of the entrepreneurial act, I think, especially in those types of sectors.

Hal Weitzman: In the first episode of the podcast, when we talked about your book, we talked about you and your fellow tax ninjas who had to go into the basement of the U.S. Treasury to do the paper trail to find out who these people were. Is that a healthy way of running the system? I'm wondering, the obvious question there is, should they have to report more about their businesses? You have this big gap in America between private businesses and public businesses. Is that a good thing?

Eric Zwick: I don't know if that's going to move the needle one way or the other. I don't know if that's necessarily a problem. I think the issues we focus on are that it's not always-

Hal Weitzman: Although you do mention in the book some large number of missing tax revenue because of self-reporting.

Eric Zwick: Yes. So there are aspects of the system, including within this pass-through area, where it's become very hard to audit businesses that are structured quite complexly, and this is more true in finance and real estate, some of the sectors that we're less focused on in the book, where you've seen a lot of this kind of growth and use of offshore vehicles and so on.

But that's an area where, yes, they should be asked to report more or we should think about ways to maybe charge a little transfer tax between linked entities that makes it... You'd only want to set up a multi-tiered entity if there was some economic reason for it.

Hal Weitzman: Or is it where we have a holding company and then another holding company, et cetera?

Eric Zwick: Yeah. Yeah. So we have this in the corporate sector. It came out of the shell companies that caused the great crash in the Depression era, and it basically flattened the corporate pyramid structures in the corporate sector in the U.S., unlike in almost any other country where there's a lot more pyramids that make it very hard to audit and very easy to kind of move stuff around in a way that might not be economically useful, but it's useful for saving tax.

So yeah, on that stuff, I totally agree. Disclosure. I think where was disclosure relevant here? Probably when politicians are actively working on policies that benefit themselves. We should figure out a way to get that disclosed or we should make sure that we're not underinvesting in local journalism that's kind of responsible for kind of keeping these folks honest.

Hal Weitzman: Yeah. I picked up on that line in your book. I wanted to know more. What would that involve?

Eric Zwick: I mean, I think this is a civic call for folks to not forget that if you live in Chicago, you need Chicago-focused journalists to be doing journalism and helping uncover some of this stuff. And if you only subscribe to The New York Times, I don't know what local journalism needs to look like. There are these new publications that seem to be trying to innovate in their models and so on, but I think we need to focus a little bit on that, because that's sort of the only way to keep some of, especially, the state and local stuff honest. But I don't have a solution there, but I think it's an area of focus.

Hal Weitzman: Okay. Eric Zwick, thank you so much for coming back on the podcast to talk about your book with Owen Zidar, The Everywhere Millionaire. Well, also everyday. Everywhere Millionaire: Who Is Really-

Eric Zwick: Everyday, everywhere. [inaudible 00:26:32] some credit.

Hal Weitzman: Every time, everyplace. The Everywhere Millionaire: Who Is Really Rich in America and How They Got There. Thanks for coming back.

Eric Zwick: Thanks. It was super fun.

Hal Weitzman: That's it for this episode of the Chicago Booth Review Podcast, part of the University of Chicago Podcast Network. For more research, analysis, and insights, visit our website at chicagobooth.edu/review. When you're there, sign up for our weekly newsletter so you never miss the latest in business-focused academic research. This episode was produced by Josh Stunkel. If you enjoyed it, please subscribe, and please do leave us a five-star review. Until next time, I'm Hal Weitzman. Thanks for listening.