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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. [1] had done almost the same thing with the piece back in October 2008! Great minds....)

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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 [2] 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 [3], has been hosting the Steve Pettit Evangelistic Team [4] 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.

quotation...

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

=^..^= =^..^=
Rob

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