And I wonder, what does that tell us about just the scaling capacity, but also the overall health of the U.S. consumer economy?

Yeah, so I think there's this fisheye lens view of the US economy that is kind of prevailing in the media narrative where it sort of zooms in on Elon or zooms in on a few billionaires and then it's like everybody's being left behind.

I think the message from these stories is that Yeah, there's a lot more opportunity for people to do incredibly well.

I mean, we're not talking about people who just have like a million bucks in a pension.

We're talking about people who don't really have to think too hard about how they spend their money at this point.

They're close to post-economic, if not post-economic, to use a term of art, where they basically like kind of, okay, I want this, I'm going to buy it.

there are millions of people like that across the country.

When you were writing this book, as we get to the end of our time here together today, I'm curious, what surprised you the most in your research as you were learning about these mainstream entrepreneurs and their businesses?

How would a person, our hypothetical 35-year-old, think through that?

there are a couple views on it one is on almost like the portfolio management question like a little bit like okay maybe you could think about you've got your crypto allocation you've got your you know alternatives allocation in your portfolio how much of that vtsx would I feel safe losing running this experiment investing like as a fraction of my portfolio? And think of that as like, sort of, this is what you have to run the experiments and feel very comfortable if like, you know, you have to go back to the job which a lot of the folks who start businesses that don't do well, we find it's not like they fall off a cliff or go to debtor's prison.

They kind of go back to work what they were doing before or find something else.

As long as you have enough liquidity to maintain your lifestyle, pay your bills and stuff, you don't have to go into a bunch of debt, since you have that budget to invest in this business.

So then the question, and this is where the creativity starts to really kick in, is like, okay, how do I run as many experiments to test some business ideas with this fixed budget as I can? So like Dave's Hot Chicken, well, you probably want to start with like a formula for a chicken sandwich or something like that, right? You could run that experiment pretty cheaply, I think.

You could also run it less cheaply by starting a business very quickly, even if you don't have the product yet, by getting a lease and starting to buy all the equipment to run the business.

But I probably wouldn't start there.

Yeah.

So could you expand on that, Eric? How did we come to this, arrive at this place of protecting monopolies in industries that a lot of us don't really think about that much?

one place we as own mentioned we saw the fingerprints of these everywhere millionaires in our public policy in ways that uh we were surprised to find how much power they really do have to affect these things was tax but another place is local market regulation and basically know they get to pole position uh in the lead in particular industries and they set up barriers to enter in some cases these are historical artifacts of provisions intended to protect the little guy from a very big guy so we go through a series of industrial vignettes in the book where we try and explore this idea of market power that's not the national big platform of market power they think we hear a lot about in the press, but more like local regional market power that pervades many industries.

So in the case of the car dealers, you have a historical desire to protect small distributors of auto vehicles from large manufacturers like Henry Ford, who were exerting a lot of influence, forcing inventory on them they didn't want, shutting them down.

And so the car dealers enshrined protections, franchise laws at the state level across most of the country.

that protect their position.

You can't, as a manufacturer, sell directly to consumers.

And you also can't shut down or allow a different car dealer to enter in that turf and provide those Toyotas.

Could you just expand on that, on the difference between the earners and the owners and the extent to which the top 1% actually identify with each of those groups?

There's a bigger story here than we thought"?

Yes.

So it was a series of years of projects, research papers, where you're kind of using the questions to try and pull back a layer of the onion, pull back another layer of the onion.

One of the first realizations was, okay, everybody's talking about income inequality and its rise, but we don't know exactly how it's happening and where it's coming from.

So one thing we did quite early on was say, "Okay, the top 1% income share, it's gone up since the late 1980s a lot." This is in Piketty's work.

Where is that coming from? It turns out just the categories of income driving it, it's not salary and bonuses.

It's not dividends and rents from, like, large public companies either or from real estate.

So if it's not brains, what actually predicts who ends up building one of these businesses?

What did your background at the IRS teach you about wealth? I guess, Eric, start with you.

Thanks, Brian.

Thanks for having us.

Yeah, so we started out in the basement of the Treasury Department with a simple question to figure out how much tax businesses pay to try and help the Treasury with scoring kind of boring tax proposals.

But what we saw was a much more interesting story about income, wealth and prosperity in the American economy.

We saw all these private business owners at the top of the income and wealth distribution doing extraordinarily well, running on glamorous businesses in industries and locations all across the country.

What did you find with that, Eric?

Yeah.

It provokes people to the bone.

It's amazing, right? So I think, you know, we're having a little bit of fun with that at the moment because we're not trying to shy away from the part of the story that is kind of optimistic.

So you know, there's a part of the story where you sort of think about the American dream.

We'll define that as sort of people who start out with their parents in the bottom quintile of income, and they rise to the top quintile, so achieve that kind of upward mobility economically.

Going that way through an Ivy League school is a very, very rare outcome.

It's just a really small number of people that go that way, and it's just not a huge force multiplier in terms of, like, the relative rate at which people achieve the American dream versus the base rate of people that go from, from that bottom quintile.

If you look at starting a business or being an entrepreneur, it's almost an order of magnitude more common because it's much more accessible as a path.

So how, uh-- Tell us about that trend, that transformation, and, and, and, and, and, and how that's changing the nature of these kind of businesses.

Right.

You know, they could add a floor to their dealership and have more models or something to display.

Hand out water bottles.

But there's some constraint based on the local market on how much they can grow relative to a larger company that can like sell more of its widgets overseas or something like that.

And so that means that when we cut their taxes, they don't grow that much.

They just the owners get more of it.

And maybe some of it goes to the workers, too, through higher wages, but not very much.

But we're not I'm not I'm not feeling like I'm getting 50, 60 percent of the doing more that I've been doing as a worker.

said the wife is thrifty, or the wife doesn't spend out of control, I remember.

That's right.

It is, yeah, I think probably some of the judgments in the book haven't aged as well as others would be my guess, but...

One of the strengths of our work is that we're building on a much broader and more representative data.

If you're relying on a marketing survey to think about the consumption habits of the wealthy, people might say that they're really thrifty when they're answering that marketing survey.

If you go and look for people who have super yachts and find what were the backgrounds that gave them the wealth to afford a super yacht, That tells you a little bit more about maybe some people are not so frugal, but it didn't matter.

They got there through running a really successful business, a ready-to-bake frozen quiche business.

Are you a member? Do you do you see yourself as a member? How do you guys, either in the book or in general, if you've ever written about it, define the so-called working class?

And he said the wife is thrifty, or the wife doesn't spend out of control, [laughs] I remember.

That's right.

It, it is, uh...

Yeah, and I think probably some of the judgments in the book haven't aged as well as others would be my guess.

But, um, you know, one of the, the strengths of our work is that we're building on a much broader and more, I think, representative data.

So if you're relying on a marketing survey to think about the consumption habits of the re- of the wealthy, people might say that they're really thrifty when they're answering that marketing survey.

If you go and f- look for people who have super yachts, um, you know, and find what are the backgrounds that g- gave them the wealth to a- afford a super yacht, you know, that tells you a little bit more about maybe some people are not so frugal, but it didn't matter.

Yeah.

That data is just mind-blowing, especially how lopsided the media coverage is on the billionaires in the Forbes 400.

To us, that's one of the main points of the book.

When you think about how to get rich or the influence of the rich in America, it's There's just such a monopoly on attention on a very small handful of people.

And we want to broaden the aperture to say, look, there's a lot of money in America.

It's a very rich place with a lot of opportunity.

And it's not just a Forbes 400.

We need to broaden it when we're thinking about opportunity, tax policy, and just a huge range of issues that people care about.

Tell us how that came about and what does that mean for policy and income and wealth inequality?

One is paying a lot less tax than the other one by virtue of the pass-through arrangement.

Yeah.

So we are taxing salaries at a different rate than taxing business income.

And so that anesthesiologist that runs most of the business through the S-Corp is 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.

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?

Fair?

Absolutely.

The mental map of American wealth, we call them everywhere millionaires because you want to get that map of the country in people's heads.

And if you put the Forbes 400, where they live, those people on the map, It's very coastal.

It's increasingly tech-focused with the tech billionaires and so on.

But the actual map of wealth in America is far more abundant and closer to home for most Americans than people realize.

So there's a car dealer or an HVAC empire, a franchise owner in every congressional district.

Professor, define rich as you're using that word, and most importantly, define Main Street

Oh, jets.

Or you start looking just based on, like, okay, where are the 5,000 square foot houses? Who owns those? And then you go look for that person kinda on the internet, not in the tax data.

We didn't do that.

That's not legal.

Um, and so we found Nancy in the yacht data.

And they got this super narrow, only applicable to car dealers carve-out for themselves and for their car dealer constituents.

It's hard to believe that without a bunch of auto dealers in congressional districts and about a bunch of auto dealers in Congress, that you would've had this very specific benefit going to them.

And so the question is, how important is business ownership versus a high and rising income from labor to getting into the top one percent or top point one percent?

If you look at top incomes, for example, take the top decile and then ask what share of people's income is coming from labor income, like from a normal salary job or from business ownership or other capital income.

The typical person in the 90th percentile is getting salaries.

But as you go up, the graph converges and crosses so that in the top 0.1%, most of the top income is coming from business income.

And The main typical way you get wealthy in the country is by owning something rather than earning.

There's a saying that salaries is for suckers.

That's a tax thing.

What do you think they're going to come back to you? What should they do? What should they not do?

What else did you, what are some other stories?

Another great story I love.

This is a generation later than Portillo, a woman named Karen Bentledge.

She dropped out of college.

She's from Connecticut.

And she started out Learning a little bit about running a business, working for somebody else, and then decide she was going to set on her own, distributing tanning beds.

So she would buy tanning beds, and initially she was just selling them, flipping them basically as a distributor, and she decided, oh...

So I almost think you're on a mission now.

What are some other stories?

Another great story I love.

This is a generation later than Portillo, a woman named Karen Bentledge.

She dropped out of college.

She's from Connecticut.

She started out learning a little bit about running a business, working for somebody else, and then decided she was going to set it on her own, distributing tanning beds.

So she would buy tanning beds, and initially she was just selling them, flipping them basically as a distributor, and she decided, oh...

So I almost think you're on a mission now.

Hmm

... 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, you know, 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, uh, 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 the hospital system as a salaried worker is paying the top individual tax rate, 37%, the payroll tax, another 3%.

Huh

Were those rules changed over the years because of the political power of this class, or were the rules changed because there was a sense that we, we as a country, we wanted to create this class, and we wanted to, to help, to help this class?

Yeah, so the history of this emerge, the emergence of especially these paths, pass-through business owners goes back to the 1980s with the 1986 Tax Reform Act, which was passed as a bipartisan piece of simplifying tax legislation.

President Reagan at the time made a bunch of money as a movie star prior to his career in politics and paid high taxes on the income he earned making those kind of B Westerns.

He found common cause with, you know, among the Democrats in Congress, Senator Bill Bradley, s- a senate from New Jersey who, uh, was this s- star basketball player and didn't like those high individual tax rates when all the people that they knew that were rich in other ways were getting all these loopholes.

And so the individual tax reform brought the individual tax rate down in the 1980s below the corporate rate for sort of the first time, uh, in the history of the income tax, and unleashed the growth of these businesses in a way that was not the intention of those tax writers and legislators at the time.

And then subsequently, you know, a h- it's sort of we've been chipping further away at the effective tax that these folks pay through the Bush income tax cuts in the early 2000s, through exempting profits from payroll tax.

Uh, this is called the Gingrich Ed- the Gingrich-Edwards loophole, which is to say it's a bipartisan loophole in terms of it's being used by folks on both sides of the aisle.

But as, as a, as, as a closing question, we've touched on some of these things, but if you had a top three list of what you'd do to make this an unqualified good story in terms of policy changes, what would you do?

And a former basketball player, of course

... as a ba- exactly.

His basketball salary, um, was very- You know, vivid, so he paid high taxes on that, but very few others did.

So Republicans in the White House, Democrats in Congress got together to drop those personal tax rates and raise corporate taxes a bit to try and offset the cost of those reduced personal tax rates.

A side effect of this is it all of a sudden made sense for businesses for the first time in the history of the tax code to organize such that the businesses themselves were subject to that personal income tax rate, which right after the r- '86 reform was below 30%.

This led to a surge in new businesses being formed in this pass-through form, businesses switching from traditional form to this pass-through form.

It lowered the effective tax on businesses overall so that the more profits people made, the more they got to keep.

Are there generalizations one can make, Eric, about how they perceive their own wealth and success?

So-

So-There are all these paths to real wealth that are much wider than the standard kind of credentialed labor market story might suggest.

So if you thought that the game was totally rigged and there was no upward mobility, I think the data just strongly rejects that view.

At the same time, there's no question that it helps to be born to high-income parents and especially business owner parents.

And Eric, what does it mean for the rest of society? I don't want you to give away the whole book, but some hints.

If it's successful, it'll be like I'll get all these texts from friends who have read the book, and like, "Oh, I just ran into somebody at, you know, daycare program.

Um, the parent, they run these plumbing businesses, and they just sold their business for $45 million," or something like that.

And, uh, to Owen's point, then it's like, okay, we have a policy problem we wanna solve.

Isn't that kind of the goal of the capitalist system?

You know, I think one way to think about what we're saying is the American dream is more alive than you think, but it's not necessarily where you're looking.

So there are all these paths to real wealth that are much wider than the standard kind of credentialed labor market story might suggest.

So if you thought that the game was totally rigged and there was no upward mobility, I think the data just strongly rejects that view.

At the same time, there's no question that it helps to be born to high income parents and especially business owner parents.

And Eric, what does it mean for the rest of society? I don't want to give away the whole book, but some hints.

if it's successful, it'll be like, I'll get all these texts from friends who've read the book and like, oh, I just ran into somebody at daycare program.

The parent, they run these plumbing businesses and they just sold their business for $45 million or something like that.

They're not going, let me go see what franchise business I can afford with my very limited resources and figure out how I'm getting in at the ground floor and the right thing.

Totally.

So, I mean, let me take a step back and think about, we're telling a lot of stories in the book, but the foundation of it is this large data set that we've spent a decade doing research.

That's basically the population of businesses in the country.

We got access to it through working with the folks at the Treasury Department on tax policy research and started writing research papers.

One of those papers is about all of the entrepreneurs in the last 20 years, approximately.

so no selection based on successes we take all the people there it's 10 million new business founders people who start businesses where they have an employee we look at their trajectory of income relative to similar types of workers on average they earn 10 percent more than a very similar worker over the subsequent decade and then there are a lot more right tail outcomes but a lot of people they start a business it doesn't work out exactly as they planned They exit, they go back to doing what they were doing before, or they start a new thing, sort of solving some of the problems that the first venture made them realize.

Is it easier or harder to achieve this version of the American dream than it has been historically? Like, you know, are these stories that you're telling becoming more and more outliers or no, they should be inspiration to you because yeah, there's plenty of venues open and it's not harder than it used to be.

So

this person I met at a beer and burger bar for lunch.

And he's a remote worker, but also the designer of the electronic filing system that sort of the schema for all of the electronic file tax returns, those rules and formulas and stuff, he set up the original Oracle database, which I think was maybe 20 years ago or something, that the data would come through when people submitted electronically filed tax returns, and that would show up in this database with no documentation, no variable names that had made any sense.

And it was like fully, beautifully denormalized as a database, but it meant you had like no idea, like an individual tax form could actually be in 20 different tables in this database.

And so with no documentation, like how to link them back together.

So it's just the schema.

And of course there's no chat GPT to help you process these things and figure out what it all means.

How do you translate that income to wealth or does it even matter? Are you just sort of assuming like there's a lot of income so there must be wealth underlying it or how does that work?

What does your book say about how it actually works in America?

The real untold story of wealth that we tell in the book is this hidden group of millionaires, Main Street millionaires in America.

They're wildly successful private business owners.

They operate in industries and places that, you know, we said they fly under the radar, so we call them the stealthy wealthy sometimes.

They own an operating company that replaces elementary school carpet floors or makes rubber mats for cars.

They distribute toilet paper.

How new is this information, just the ability to kind of quantify things this way, and, and why did you two feel it was important to frame it this way?

Our research in the book, and then the academic research that it builds on, comes from over a decade of us working initially in the bowels of the Treasury Department with, uh, administrative tax data, where we were able to link the population of businesses to people at the top of the income and wealth distribution, and sort of ask what is driving the growth of their income and wealth over time.

What does your book say about how it actually works in America?

The real untold story of wealth that we tell in the book is this hidden group of millionaires, Main Street millionaires in America.

They're wildly successful private business owners.

They operate in industries and places that, you know, we said they fly under the radar, so we call them the stealthy wealthy sometimes.

They own an operating company that replaces elementary school carpet floors or makes rubber mats for cars.

They distribute toilet paper.

How new is this information, just the ability to kind of quantify things this way, and, and why did you two feel it was important to frame it this way?

Our research in the book, and then the academic research that it builds on, comes from over a decade of us working initially in the bowels of the Treasury Department with, uh, administrative tax data, where we were able to link the population of businesses to people at the top of the income and wealth distribution, and sort of ask, "What is driving the growth of their income and wealth over time?" In the 1980s, personal tax rates, so the tax that individuals pay, was, were much, much higher than the corporate tax rate.