Philadelphia's mayor does not understand economics or business

Eric Boehm:
After driving up the cost of soda and other sugary drinks with a new tax, the mayor of Philadelphia is now trying to blame businesses for charging higher prices (and for the outrage those prices have generated).

Mayor Jim Kenney, who proposed the soda tax and championed its passage through city council last year, told reporters on Tuesday it's not the new 1.5-cents-per-ounce tax that's making it more expensive to buy a can of Coke in Philly. No, according to the mayor, those higher prices are caused by city businesses price gouging their customers in order to stir up opposition to the tax.

"They're gouging their own customers," Kenney said, KYW News reports.

To understand Kenney's reasoning, you have to know that the new tax technically is applied at the wholesale level. That is, the city is charging a tax on the transaction that takes place when a business, like a sandwich shop or grocery store, purchases soda (or the syrup used to make soda in a fountain) from a distributor. In the mayor's mind, it seems, distributors and retailers are supposed to eat the cost of the tax and continue selling their products at the same price as before the tax went into effect.

In the real world, those sandwich shops and grocery stores, of course, are adjusting the retail price of sugary drinks to make up for the added cost imposed by the tax. Some of them have posted signs to inform customers why drink prices have skyrocketed.
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Newswork's Katie Colaneri visited Carbonator Rental Services in Philadelphia to break down the math.

The distributors sells five-gallon boxes of syrup that can be used in soda fountains, and each box costs a retailer about $60. Thanks to the city's new tax, though, retailers have to pay $57.60 in taxes for each of those boxes of syrup.

"We're not talking about a couple of bucks on a $60 item," Andy Pincus, who owns Carbonator Rental Services, told Newsworks. "We're talking about $57.60 on a $60 item. It's too big not to pass on."

Pincus says he can't absorb the tax because he makes less than $20 in gross profit—the difference between how much he paid for the box of syrup and how much he sells it for—on each box. Out of that money, he has to pay all his employees, buy gas for delivery trucks, and cover all the other costs of doing business. So, he increased the price he charges to retailers buying syrup from his business. Those retailers, who are operating under similarly small margins, are doing the same thing and increasing prices charged to consumers.
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It looks like Kenny and the city are the ones doing the gouging.  His argument is as unintelligent as the tax is.  Liberals do not seem to grasp the law of diminishing returns.   The higher you raise the price of something the less of it you will sell.  Businesses already know that, but mayors and other politicians appear to be ignorant on the issue.

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