Chicago Booth Review Podcast Who Are the Multimillionaires Among Us?

Eric Zwick: I think the story is there's a lot of optimism about the American dream not being totally dead, especially the extent to which you can achieve the American dream starting at the bottom, rising to the top through entrepreneurship. I feel like there's a lot of reason for optimism to feel like those opportunities are still available.

Hal Weitzman: When you think of someone who's rich, who comes to mind? Many of us would think about the billionaires of Silicon Valley, AI entrepreneurs, or the titans of Wall Street. But what about toilet paper and toothbrush manufacturers, chicken processors, and burger chain owners? 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 Eric Zwick about the book he's written with Owen Zidar, The Everywhere Millionaire: Who's Really Rich in America and How They Got There. This is the first of two episodes about the book, which chronicles the rise of a class of mainly business owners with a net worth of at least $5 million and who are typically worth around $25 million. How did Zwick discover them? How do they make their money? And what does their emergence as a group tell us about the American dream? Eric Zwick, welcome to the Chicago Booth Review Podcast.

Eric Zwick: Thank you for having me.

Hal Weitzman: We're delighted to have you to talk about this very entertaining book. Who knew that talking about taxes and well, obviously getting wealthy is entertaining. You've got a lot of individual stories in this book, a lot. Some of them rags to riches, some riches to even greater riches. How many people did you interview and how did you find them?

Eric Zwick: Yeah, so the goal of the book is to kind of compliment this huge administrative data research that we've been working on for over a decade using anonymized tax data. So we see everybody, but we don't know who they are in that data. And our thought is a lot of the inequality literature and also famous books about it, like Pickety's Capital or The Millionaire Next Door even, they're either anonymized or they don't really talk about actual rich people. In Pickety, it's Jane Austen characters mostly. And so we were like, okay, let's figure out some ways to find them and go talk to them almost channeling a much less skillful way, Michael Lewis or somebody humanize this group, but also present the richness, the diversity of them so that we can maybe get beneath the surface of the superficial top 1%. They're all monolithic class.

Hal Weitzman: So were they happy to be interviewed? Because I know that sometimes people, you call them in the book the stealthy wealthy, sometimes they deliberately create trusts or holding companies to hide their wealth and that kind of thing. So were they happy to be interviewed by you, most of the people?

Eric Zwick: We had a lot of fun talking to most of these people. It's true that the sadder or darker the stories were, the less they were interested in sharing or talking to us and the more we ended up relying on secondary or alternative sources when describing those stories. But a lot of these are, tell me about your background, tell me about your family, tell me about some of the hard parts of the business. And people love talking about that. There's a hero story that people have about themselves, especially in this class. But then also some of the inheritance stories that we've talked about, people like talking about their relationship with their parents and how they learned and the struggles sometimes, also it's a bit therapeutic. We don't ask them how much are you worth? We sort of use our knowledge of the data to try and estimate it and just give a rough sense of it. So the specifics maybe that people would be more uncomfortable with, we don't really need to because we kind of have the big admin data to draw on there. So I think that's how we balance that sensitivity.

Hal Weitzman: Okay. And it all adds up to a big narrative which is going to dispel some people's priors about who is wealthy in America. So what do you think is wrong with the kind of popular mainstream narrative about whose rich in America?

Eric Zwick: Yeah. So our view is that the mainstream narrative is too focused on the billionaire class, tech founders, Wall Street, finance, bros, et cetera. So the Jamie Diamond, Elon Musk, the coastal elite, and wealth is actually far more widely distributed, ultra rich are kind of all over the country. They're in a diverse set of industries and they're far more numerous than people really appreciate. So one statistic is for every large company CEO, so think about the CEOs who make substantial money, it's like 1500 public companies with CEOs at that level, there are more than a thousand closely held business owners in the country for each one of them that have net worth above $25 million. So those are pretty rich people. They're not as rich as the richest CEO, but collectively they're far more numerous.

Hal Weitzman: Okay. Yeah. I mean, I guess maybe it seems less exciting. Maybe that's why they get less attention is that... Like you say, 25 million is not whatever Elon Musk has at any one moment in time. So it's not the most exciting, but you're saying that's what rich really means.

Eric Zwick: Well, we're trying to go up into the tail as well. So we look at people who become deca millionaires, centimillionaires, billionaires as well, but maybe through these less appreciated paths. So we have a story of a realtor who basically represents builders in closely planned developments in Texas. And because he's able to do such an immense volume, he's still working at 80 doing this thing every day. We think he's probably worth 50 to 100 million dollars, maybe more. And the flow that that business generates is quite substantial. This is an unusual story. You won't see these types of stories in front page Wall Street Journal, and you won't hear politicians who are talking about the ultra rich talk about this type of person at all.

Hal Weitzman: Right. Well, I mean, it's quite the opposite actually as I think we're going to talk about. But this is a story about the rise of this everywhere millionaire class, isn't it? This isn't something that's always existed. So tell us about what prompted the rise of that class.

Eric Zwick: Yeah, so there've always been closely held private businesses in the economy. They haven't been as wealthy as they are now. And we go back to the 1980s as kind of an important inflection point and there are economic factors, trends that they're able to capitalize on. So one is the decline in interest rates over this time and decline in inflation. Another is the rise of globalization, deregulation that expanded markets. Another is a shift from capital intensive activity like heavy manufacturing into services, which allow firms to grow while not having to raise a ton of external capital. So you can have a big share of a business and grow it incrementally just reinvesting the profits and maintain that ownership, especially in these types of industries that are less capital intensive. Those are kind of a set of the economic tailwinds, I think.

And then there's policy tailwinds that we got into this because tax policy really changed a lot in this time period. Tax rates came down a lot, but especially the relative gap between traditional corporate businesses and these quote unquote pass through businesses that are the focus of a lot of our research, such that all of a sudden it made sense for firms to organize as pass throughs, the effective tax rate for them, because instead of paying at the business level they pay at the individual level, went down from at some point it was like 70%, these top marginal tax rates.

Hal Weitzman: Just remind us what a pass through business is. How does that function?

Eric Zwick: Yeah. So pass through businesses, most businesses in America are pass throughs now. This was not the case in 1980. They have a small number of owners typically and mostly individual owners as opposed to having venture capital investors or public companies. So those would be traditional corporations. Their tax treatment is a traditional corporation pays tax at the firm level, and then when it pays dividends or distributes to the owners, depending on their tax status, they pay tax at the shareholder level. Pass throughs don't have that first layer. They just have taxes at the individual level. So it all passes through to the owners who then pay tax on their share of the income. This wasn't an attractive form before the 1986 tax reform because the individual tax rates were so much higher than the corporate tax rates. So you want to be a closely held business, you wanted to be a traditional corporation, leave the money in the firm, pay lower taxes there.

But all of a sudden, the Reagan era reform made it attractive for pass throughs. And this was further supercharged. Bush tax cuts brought the individual rates down further. The 2017 TCJA changed things a little bit, but also introduced a new category for a subset of pass-throughs to get lower tax rates too.

Hal Weitzman: That was the tax reform from the first Trump administration.

Eric Zwick: Yeah, the Tax Cuts and Jobs Act or the TCJA, I guess there's a formal name for it in reconciliation that has 50 words long. So all these trends over this 40-year period kind of pushed firms to reorganize or reallocate, but also meant the effective tax burden was lower. So their after tax savings, the value of a dollar earned in the business was higher too. So that increased the wealth, the value of the business.

Hal Weitzman: So the story of the rise of the everywhere millionaire class is the rise of pass through-

Eric Zwick: Huge part of the story. Yeah. And also it's a huge part of our story, which is finding these people and recognizing their role in inequality. So unlike traditional corporations, because of the way they're taxed, there's this paper trail that links the businesses to the owners. So you want to know about the 1%, you say, okay, these people have top 1% in income. If they own a traditional business, you might not be able to see how they're driving that income or you wouldn't be able to see much about those businesses. But if it's through a pass through business, then you can link through explicitly in the administrative data, you can say, okay, what is this business? How big is it? How many owners does it have? What industry is it in? Where is it located? And that richness, that was the eureka moment in our research, inspired by Tufty's book actually.

I made all these graphs and tables, really high density data to be like, what's going on here in this data? And it's like, oh, it's a bunch of doctors and car dealers and beverage distributors and mid-market manufacturers. There's some tech, but there's a lot of other stuff. So it's like this diversity really popped out of that data, which wouldn't have been possible without the pass through data link. So the rise of pass throughs has played two roles in our story.

Hal Weitzman: And the way that you describe in the book, you and your colleagues in the basement of the US Treasury going through these documents is really fun. I want to get into it a little bit, but you referred there a little bit to who these people are. Dentists is one that's been highlighted in the media, but there are many others and many of them... There is another separate narrative, isn't there, that you don't make money from tech. This is maybe a rival narrative, but it's there. You make money from quote unquote unsexy businesses like the ones you quote are things like gutter manufacturing, toilet paper manufacturing, making toothbrushes, as a woman who makes frozen quiches has a frozen quiche business, chicken processing, and then of course a large number of people in your book are owning chains, pizza joints, burger chains, that kind of thing. So is it mostly these unsexy businesses?

Eric Zwick: So our story really centers those unsexy businesses in part to draw attention towards them.

Hal Weitzman: I'm using unsexy in quotes. I don't think there's anything unsexy about-

Eric Zwick: Oh, yeah. No, no. I mean, with this amazing quote from Russell Westbrook, who's a famous basketball player who has gotten into investing in unsexy businesses where he says, "Unsexy is sexy to me." And it's just a great quote because he's also a fashion icon in the NBA. So I just love that he's now into buying franchise car washes and stuff. So I think there are a lot of the stories in the book are like that. And in the data we sort of say, okay, here are the top 20 industries that generate a lot of pass through income for folks that are in the top one or 0.1%. And yeah, the diversity pops out. There are some sectors that are big that probably are not in the car wash manufacturing distributor bucket. They're in the skilled service bucket. So that would be the law firms, both top law firms, but also these boutique law firms, 10, 20 partners type, folks are bringing in 500,000 to a million dollars a year, maybe more at the top of those firms. And there's just a ton of them.

Same with doctors, not the ones that work in hospitals necessarily, but the ones that run centers or practices that have... There's an entrepreneurial element to what they're doing. They're scaling up the skilled service business, but like a cataract sort of center. A doctor who owns that, an ophthalmologist or something would be quite wealthy and would show up in our data, and that would be another example. So maybe there are these two groups. We'd say they're main street businesses in the sense that they're not Wall Street, they're not Silicon Valley, and there are a ton of them. They're collectively generating tons and tons of income, tons and tons of wealth, and they represent a big chunk of the economy in terms of how many workers they employ and how distributed they are across the country.

Hal Weitzman: And there is a theme there, isn't there? Because you mentioned it's sort of about entrepreneurship and ownership, sort of the idea, which is also quite mainstream now, but you don't really get rich from taking a salary, you get rich from owning something. Whether you're a doctor or a lawyer or it's pizza joints, right?

Eric Zwick: Yeah. So equity seems to be the paths. The more you go up the wealth distribution, the more everybody looks like they derive most of their income from owning a business. And it's not just like they have a stock portfolio and they have equity that way. Maybe they take some of the savings, reinvest it as diversification, but it's a closely held concentrated position in one business. It could be a franchise business with a bunch of locations, but it's kind of that concentrated... But equity ownership, which means if you're doing well, if the business is doing well and doubles revenues and you're managing costs and stuff, you could, if the business is doing just 10 million in revenues but a 10% profit margin, have a million dollars pre-tax of income because you own the whole thing. And there are just hundreds of thousands of businesses that look like that across the country, but you have to be an owner to grab that chunk of the profits.

Hal Weitzman: If you're enjoying this podcast, there's another University of Chicago Podcast Network show that you should check out. It's called Not Another Politics Podcast. Not Another Politics Podcast provides a fresh perspective on the biggest political stories, not through opinions and anecdotes, but through rigorous scholarship, massive data sets, and a deep knowledge of theory. If you want to understand the political science behind the political headlines, then listen to Not Another Politics Podcast, part of the University of Chicago Podcast Network. Eric, in the first half, we talked about your research about everywhere millionaires, and they really do live everywhere. We didn't talk about that, but they're not just in Manhattan or just in Gold Coast Chicago or Silicon Valley. They really live everywhere and they are among us, we could say. You found out these people, you kind of did the paper trail. You were the detective, you and your colleagues. Tell us a little bit, you called yourselves the tax ninjas.

Eric Zwick: Right.

Hal Weitzman: Tell us about the adventures that you had in the basement of the US Treasury Building.

Eric Zwick: Yes. So we're kind of silly, and I think folks who read the book will recognize that one reason to write a book like this is that when you write academic papers, you don't get to be as silly as you get to when you write a book to also entertain people while you teach them something. And so while we were doing this research, we were invited to be kind of unpaid experts working with career civil servants, these amazing economists and the staff of the Office of Tax Analysis to help them with data products that were useful for tax policies. So when there was a reform introduced to estimate like, okay, how would this affect the taxation of partnerships, which is a type of pass through business, the treasury didn't have the data infrastructure set up to actually estimate that thing. They were kind of guessing because it was hard to put together the data linking the firms to the owners, figuring out the tax rates of all the owners and mapping that back to the firms and all this stuff.

So we worked with a half dozen of treasury economists to assemble the first prototype data set. We built on that through sponsorship from folks there and also in the IRS's office of research to write research papers that studied these data and tried to tell the story of how they're driving income inequality, wealth inequality, entrepreneurship in America, who gets to be an entrepreneur, what factors matter there, and all with tax policy implications. Like if we change the tax rate on one type of business, that's going to affect behavior, that's going to change who organizes one type of firm. So there's always this link between the research we're doing and also trying to just improve society's tax system. And we're screwing around in the treasury with this data. The computers are super old. I had a background as a software developer and working on these servers, I'm trying to hack together MacGyver-like programs that call programs that write programs that call other programs, especially if something breaks and doing all that stuff.

And we'd go get lunch and then we come back in the treasury with our notes from the lunch. We're talking, we're staying in an Airbnb, living together, the three of us. This is me, Danny Yeagan, who's a professor at Berkeley, Owen Zidar. Professor Princeton who was here at Chicago. We started at the same time, and so that's how we started working together. Yes, we call ourselves the tax ninjas. In part, folks that we worked with were calling us the three amigos because we were always wandering around the treasury together inseparable during this time especially. I don't know where the ninjas term came from, I guess because it was really dark in the basement of the treasury, so it felt appropriate.

Hal Weitzman: Okay. I know this has provoked years of research, so it's hard for me to say, right, can you just summarize that in three bullet points, but could you?

Eric Zwick: Right. So there's a series of research papers that kind of have this arc of whose really rich, where they come from, and how they're driving also other economic forces. But the first part is you want to understand what's driving rising income inequality. You have to understand the pass through sector or these pass through firms, because the growth in pass through business income accounts for more than half of the rise of top income inequality and top 1% income share over the 30-year period starting the early 1990s that has spawned thousands and thousands of papers about the top 1%, starting with Pickety and Saez's seminal work there. And then we can sort of continue that to say, okay, what's the relationship between the pass through income inequality facts that we documented in terms of who they are? We looked into who they are and it was all these doctors, lawyers like we had talked about, and car dealers and beverage distributors and so on.

How much of it really is like they've amassed massive wealth that they're generating income from versus a mix of financial and human capital? Like a doctor, you think of most of what generates high income for that person is their expertise, their network, et cetera, their position. And so if they stop working, the income would go away. So we spent a lot of time trying to think about is this wealth human or non-human capital? And we tried to then parlay that into an investigation of rising wealth inequality trends. And I think we helped try and recast the narrative of rising wealth inequality to be not so much about passive accumulation of low risk wealth, but really this closely held business wealth, equity-like wealth, these entrepreneurs, business owners, family businesses and so on, more importantly-

Hal Weitzman: Which is different. I mean, you talked earlier about Pickety, Thomas Pickety, who made a huge splash. It was kind of the opposite. Is that fair to say to what you are talking about?

Eric Zwick: Pickety's story-

Hal Weitzman: Well, distinct anyway.

Eric Zwick: Yeah, I think the narrative in that book, for those who've read it, which is quite long-

Hal Weitzman: Read all of it?

Eric Zwick: I encourage... Yeah, I promise our book is half as long and funnier.

Hal Weitzman: And you don't need a book group to read it page by page. It's an easy read.

Eric Zwick: That's right. But the Pickety story is that it's really about rising capital, financial non-human capital, and reduced tax burdens on that that allowed sort of compound interest-like perpetual accumulation of that capital and sort of a forecast that that would just continue or there's a good chance that that would continue. And that prompts calls for wealth taxation and so on, but that story of... I think of it as large amounts of easy to transfer financial wealth, bonds, stocks, real estate and so on, maybe not such a high rate of return, maybe not such a... It doesn't matter who owns it for the rate of return. It's quite different from these closely held mid-market businesses that are kind of the, they call it G1, the first generation, the founder seems like kind of really important to the functioning of that business in a lot of these cases, not always. It's a different story and it has implications for how we tax it, has implications for what's driving inequality for public policy, thinking about education and so on as well.

Hal Weitzman: Yeah. Like you said, when we think about the accumulation of capital and the inheritance of capital, we don't really think about the guy owning 25 fried chicken joints or whatever.

Eric Zwick: That's right.

Hal Weitzman: That tends to be something... So you're pointing out it's a little bit more subtle. Having said that, inheritance is helpful. The old joke about how do you make... What is it? How do you make a million dollars inherit $10 million or whatever? So it helps, right?

Eric Zwick: That's right.

Hal Weitzman: Elon Musk being one example of that you don't talk about obviously because he's not in your group, but this seems to have implications about social mobility and the American dream. What do you think those implications are?

Eric Zwick: Yes. So we have a chapter on the inheritance channel called The Shortcut, which we think of as part two of the book is sort of like how to get rich. A really easy way is to be born rich, as you said. And we want to know how common is that? And so for this class of people, these closely held business owners that have average net worth of $25 million, but up into the tail as well, we estimate, it's hard to figure out, but 20 to 30% of those folks inherited the business or founded a business with substantial resources from their parents. Which means the typical one is not like that, but there are a lot who are coming through that shortcut route. And we like to spend a lot of time sort of thinking about how easy is it to transition these types of businesses across generations? What does it look like when it goes well?

Typically, it takes a very sophisticated and patient and thoughtful first generation founder to say, okay, let me look within the family to find somebody who has a good chance of being able to take over, get them in really early, get them a lot of training, be willing to hand over the reins. There's a lot of things that need to happen for that to go well, and quite often it doesn't, in which case, the business is sold. Private equity is actually a big source.

Hal Weitzman: Right. We haven't talked about that, but the whole rise of private equity is directly connected to all these businesses.

Eric Zwick: Think about private equity as solving the succession problem for these businesses that otherwise would fail completely probably if passed the next generation would run quite poorly. And then the wealth goes to those next generation and the next generation does a lot of things with it. Sometimes they spend it wisely or invest or become business owners themselves. Sometimes they spend it more aggressively. These folks tend to have a lot of kids. They often have multiple spouses, so the wealth does kind of dissipate across generations.

Hal Weitzman: Not at the same time, one hopes.

Eric Zwick: Yeah, in series usually, I think. I think we don't have any ones where that's in parallel in the book that we know of.

Hal Weitzman: Okay. But talk more generally, the social mobility. Does this suggest that social mobility, because as you say, next generation that we can chart out the next generation, does this suggest that social mobility is going to get worse?

Eric Zwick: I think the story is there's a lot of optimism about the American dream not being totally dead, especially the extent to which you can achieve the American dream starting at the bottom, rising to the top through entrepreneurship. I feel like there's a lot of reason for optimism to feel like those opportunities are still available for folks. They're going to look different than they did previously. You have to use new technology, find new opportunities, capture new trends. But I think there's a lot of optimism about the American dream that comes out of these stories, which is not to say that there's equal opportunity for everybody. And so the chance that you become a successful entrepreneur starting at the top is quite a bit higher. So understanding what generates that and what policy responses might be helpful in trying to improve the opportunity set for folks to pursue these paths coming from less fortunate means.

But I think what gives me some hope is the entrepreneurship channel, I mean relative to a lot of other channels to the top, quite broadly, it's available to immigrants who don't speak great English. It's available to those with criminal records and not in all sectors, but in many sectors because it's not just white collar stuff, it's not just college educated folks that are starting these types of businesses that grow well because there's a lot of unskilled or skilled blue collar service businesses where they scale. HVAC, construction, food service, and there are a lot of opportunities there and we tell some of those stories and I think they're quite inspiring. So I have hope, but I also have concern about we want to make sure that that hope is realized.

Hal Weitzman: Eric, thank you so much for coming on the Chicago Booth Review podcast. Talked about your book, The Everywhere Millionaire: Who's Really Rich in America and How They Got There.

Eric Zwick: Thank you so much. Great to be here.

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.