An interesting observation was made in an online comment among the many posts about Southwest Airlines’ “bags no longer fly free” policy change. One commenter noted that because of how the tax code is structured, even if Southwest lowers its fare and collects the same total, it will be taxed less on the fees and come out ahead. (In other words, a $300 fare is taxed higher than a $270 fare + a $30 bag fee).
That math may work out in their favor tax-wise, but it doesn’t take into account how it feels to a customer. A $300 fare and free bags feels better than $270+$30. BOGO sales are so popular because one free product feels better than two at half-price. Car rebates help the buyer feel like they got a deal. JCPenney learned the hard way that customers feel like they are getting a better price with coupons instead of routine discounts.
The tax code may appeal to the logical bottom line, but the emotional component of a transaction feels richer in the long term.
