ivman's blague rotating header image loading ... please wait....

Coffee Shop Economics

At this time of year, Americans have either already done their income taxes or still have about a month and a half to put it off. On top of that, we just heard today about the president's proposed new budget with tax increases for the nation's most wealthy. (We all will have to wait breathlessly to see if there's any chance it can go through.) This all made me think of something that's been aging in my files for the right moment to be posted....

picture of latte

Coffee Shop Economics

Suppose that every weekday ten men go out for lattes. The coffee shop is the best one around and their beverages are not cheap. Each day the total bill for the ten men comes to $100.

If they paid their bill the way we pay our taxes, it would go something like this:

- The first four men (the poorest) would pay nothing.
- The fifth would pay $1.
- The sixth would pay $3.
- The seventh would pay $7.
- The eighth would pay $12.
- The ninth would pay $18.
- The tenth man (the richest) would pay $59, enjoying the latte and his friends.

So, that's what they decided to do. The ten men had lattes every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve.

"Since you are all such good customers," he said, "I'm going to reduce the cost of your daily coffees by $20."

Lattes for the ten now cost just $80. They could continue to enjoy their lattes and their time together, but for a lot less!

The group still wanted to continue to pay their bill the way we pay our taxes, so the first four men were unaffected. They would still drink coffee for free.

But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his "fair share?"

They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his coffee.

So, to be fair, the owner suggested reducing each of the six men's bills by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so:
- The fifth man, like the first four, now paid nothing (100% savings).
- The sixth now paid $2 instead of $3 (33%savings).
- The seventh now paid $5 instead of $7 (28%savings).
- The eighth now paid $9 instead of $12 (25% savings).
- The ninth now paid $14 instead of $18 (22% savings).
- The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to drink coffee for free. But once outside the restaurant, the men began to compare their savings.

"I got only one dollar out of the $20," declared the sixth man. He pointed to the tenth man, "but he got $10!"

"Yeah, that's right!" exclaimed the fifth man. "I saved only one dollar, too. It's unfair that he got ten times more than I!"

"That's true!!" shouted the seventh man. "Why should he get $10 back when I got only two? The wealthy get all the breaks!"

"Wait a minute!" yelled the first four men in unison, "We didn't get anything at all. The system exploits the poor!"

The nine men surrounded the tenth man and beat him up.

The next night, as much as he had previously been enjoying coffee with the guys, the tenth man didn't show up for coffee. So the nine sat down and had their lattes without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them to pay even half of the tab! Too late, though, since their wealthy friend had no plans to return.

And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction, all the while still getting stuck for most of the tax revenues. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might go to other coffee shops where the atmosphere is somewhat friendlier and less demanding and where they can drink a latte for the same price everyone else pays and possibly with nicer friends.

(Added 5 March 2009: I just learned that the original idea for the scenario above came from David R. Kamerschen, Ph.D., Professor of Economics, University of Georgia. The original that I received was unattributed and I could not find the source. I changed it quite a bit, turning it into a coffee shop instead of a bar, but I'd like to give credit where credit is due. I was really surprised to find that Muddy Dog Roasting Co. had done almost the same thing with the piece back in October 2008! Great minds....)


What are your thoughts on the Coffee Shop Economics story above? Do you think it's valid? There's an interesting article about this type of thing called The 2% Illusion in the Opinion Journal of today's Wall Street Journal.

This week has been extremely full, but definitely good. Our church, Hampton Park Baptist Church, has been hosting the Steve Pettit Evangelistic Team all week. The messages have been excellent and the music outstanding. Anyone local who would like to attend Friday evening's Irish Sacred Concert, the meeting begins at 7:00. Come a few minutes early to get settled into a seat before it starts.


"Every person born since Adam's sin is not God-centered, but self-centered." - Steve Pettit

=^..^= =^..^=

The IRS looks at every taxpayer as having what it takes.

Print This Post Print This Post

If you enjoyed this post, to get updates when I post to my blog, sign up for your preferred method below — RSS, Twitter, or e-mail.

10 Comments on “Coffee Shop Economics”

  1. #1 Vikki
    on Feb 27th, 2009 at 9:08 am

    A father picks his daughter up from college for spring break. For most of the trip the daughter, now a hard core Democrat, complained to her father, a Republican, about how the poor are so discriminated against. “They don’t have good health care, a decent place to live, good schools…” She went on to complain about the rich, who have so much money, but are hardly lifting a finger to help. “Something should really be done about it.”

    Her father asked how she was doing grade wise. “Fantastic! I’m holding a strong 3.9.” He then asked how her friend was doing. “Not too well. She’s struggling in most classes and is on the verge of dropping out due to her grades. I’m really concerned about her.”

    He offered her this suggestion. “Since you have such a strong GPA, why not go to the school and offer to give part of your GPA to your friend. That way you could both have average grades and she will be able to finish school without a problem.”

    Very indignantly she answered “No way! I worked hard for those grades!!”

    He turned to her and said, “Welcome into the Republican world.”

  2. #2 Heather
    on Feb 27th, 2009 at 12:04 pm

    Given a choice between free coffee and ten dollars off expensive coffee, I’ll take the free coffee any day. Depending, of course, if the free coffee is any good. 🙂 Since, in my limited wisdom and experience, the root of the tax break problem appears to be covetousness, I doubt there is a way to make taxes “fair” to all concerned. I’m just glad my Father owns it all, anyway, and He has promised to give me what I need. 🙂

  3. #3 Rob
    on Feb 27th, 2009 at 1:49 pm

    @Vikki – Thanks for a great illustration!

    @Heather – Who wouldn’t want a “free coffee?” 😀 The only thing is, that someone has to pay for that “free coffee.”

  4. #4 Roy Hooper
    on Feb 27th, 2009 at 3:19 pm

    For we brought nothing into the world, and we cannot take anything out of the world. But if we have food and clothing, with these we will be content. But those who desire to be rich fall into temptation, into a snare, into many senseless & harmful desires that plunge people (and possibly a nation) into ruin & destruction. For the love of money is a root of all kinds of evils.
    1 Timothy 6:7-10a (ESV)

    I share Heather’s sentiment: “My Father owns it all, anyway!”

  5. #5 Chris Berry
    on Feb 27th, 2009 at 4:27 pm

    This is one of the best examples I’ve ever seen about our tax system and the perception of fairness.

  6. #6 Rob
    on Feb 27th, 2009 at 4:57 pm

    @Roy (and Heather) – I agree completely that our Father owns it all – no arguments from me on that score. The irony of this story is the punishment of achievers and the sense of entitlement on the part of those who get inflamed by class envy. The illustration is almost too true-to-life to be humorous. My hope in posting this was that those of us who are on the poor end of the spectrum might get a clearer picture of what the wealthy actually do and are forced to endure.

    @Chris – We’re on the same page. When I read this I thought how clearly it pointed out the way things are. The only divergence from real life is that the wealthy man would willingly pay so exorbitantly for his latte with the other men! In real life, the wealthy man has no choice about the confiscatory amount he has to pay as his “fair share” of the tax burden – he has to pay through the nose.

  7. #7 Matthew Campbell
    on Feb 28th, 2009 at 9:23 pm

    Uncle Rob,

    Excellent post and illustration. Who wouldn’t want a free coffee? But, we forget the old saying, “There is no such thing as a free lunch….er, coffee.”

  8. #8 Rob
    on Feb 28th, 2009 at 9:28 pm

    @Matthew – Thanks, Matt! The idea of a free coffee is great. In the last year I’ve had two free coffees – one great, one not-so-great. But you’re right in saying there’s no such thing as a free lunch/coffee. If one of my profs in grad school said that once that semester, he said it twenty times. I always think of that course when I heard that saying.

  9. #9 Dan Sehested
    on Mar 2nd, 2009 at 7:55 am

    My mom sent me this quote. It sure does apply today.

    “You cannot legislate the poor into freedom by legislating the wealthy out of freedom. What one person receives without working for, another person must work for without receiving. The government cannot give to anybody anything that the government does not first take from somebody else. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that my dear friend, is about the end of any nation. You cannot multiply wealth by dividing it.” – Dr. Adrian Rogers, 1931-2005, the late president of the Southern Baptist Convention

  10. #10 Rob
    on Mar 2nd, 2009 at 7:58 am

    @Dan – Thanks for that quotation that is so appropriate to this post. The class envy of the rich (I think the Bible calls that covetousness) could well end up being part of the eventual undoing of this once-great country.