But Is There Such a Thing as a Free Breakfast?

Changes to Tax Laws Affect Spending Behavior

JUNE 27, 2010 by RALPH HOOD

Filed Under : Taxation

Back in the mid-eighties I participated in a conference of small business owners. (Very small—my own multinational corporation consists of me, my wife, and a dog. The dog is part-time.) One workshop leader explained that we could no longer deduct 100 percent of business travel meals. Henceforth, we could only deduct 80 percent (that dropped quickly thereafter to 50 percent, where it remains to this day).

Since we are a traveling group, this new ruling was important to us. It meant that we could fly first class, stay in a four-star hotel, and ride the limo to and from the airport. All of that was 100 percent tax-deductible. If, however, we ate a cheeseburger at McDonald’s, we could only deduct half of it.

According to media and press reports, this ruling would increase government income by a certain amount—an amount calculated by assuming that businesses would continue to spend on business meals exactly what they had spent in the past.

Ah, but a funny thing happened on the way to the restaurant. The market does react to any change in the fiscal environment, and that includes changes in taxes.

Almost immediately, hotels and motels began to advertise “free” breakfast with a room. It was not “free,” of course, but it was included—hidden, you might say—in the price of the room.

Aha, said I. Because the price of the room is 100 percent deductible, this means that I am actually deducting 100 percent of my breakfast charges. That is a good deal for me, and I will do business with motels that engage in this practice.

When business finds a way to provide the customer something that is worth more to the customer than it costs the business, that “something” will proliferate, and this was no exception. The free breakfast spread like gossip on a party line. At first it was just doughnuts and coffee, but competition forced improvement. Today I can get a full breakfast—often including a made-to-order omelet—just about anywhere.

Certainly no motel advertised the free breakfast as a way to avoid taxes, but we who spent the money knew. And we spent.

The inevitable came to pass. Somewhere in the offices of a motel chain, the powers that be said, “Hey, what else can we provide that is deductible if we spend the money but not normally deductible if the customer spends the money?” “Booze?” someone asked. Thus was born the “free” cocktail hour.

The free cocktail hour had an even bigger benefit for the customer on the expense account. Not only could the business traveler not deduct booze, but the boss wouldn’t reimburse for it, either. But when booze is “free” the boss needn’t even know about it.

Has this idea grown? Recently I checked into a moderately priced motel in Mississippi. In the lobby was a washtub filled with beer on ice. What, I asked, is the deal on the beer? That, I was told, is our redneck happy hour. Help yourself. It’s free.

Where will this all end? I wonder.

In the meantime, do you suppose the government wonders what happened to all that money it was going to collect?


April 2002

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December 2014

Unfortunately, educating people about phenomena that are counterintuitive, not-so-easy to remember, and suggest our individual lack of human control (for starters) can seem like an uphill battle in the war of ideas. So we sally forth into a kind of wilderness, an economic fairyland. We are myth busters in a world where people crave myths more than reality. Why do they so readily embrace untruth? Primarily because the immediate costs of doing so are so low and the psychic benefits are so high.
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