For spraying paint my current setup is a 50' hose from the compressor to the water filter and then a 25' hose to my gun. I have this setup to cut down on moisture. The theory is that the 50' hose will cool the air and cut down the possibility of moisture at the gun. I also know that I will have less pressure at my gun as hose length increases. I'm thinking of taking the 50' hose out. Should I change my setup?

The way you have it is the best without adding expensive piping etc. If you take out the 50' hose, you won't get any cooling of the air before it passes thru the water trap, hence very little water will get removed.

My recommendation would be to replace the 25' hose with another 50 footer so you can go all the way around a car. If you are concerned about pressure drop and don't have a regulator/gauge at your gun, then install a line regulator at the water trap as a separate piece or a combo trap w/regulator.

I do have a regulator at the gun and I am setting my gun at 23psi. My compressor passes 8.1 cfm at 40psi and I just want to make sure that I'm getting the most out of it.

Vettefella's right, forget cooling the air with a hose, it holds the heat in. If you want the most of your tool, you will use 25 ft or so of 3/4" galvanized pipe then the water trap and then 25" of 3/8" hose. It isn't that big of a deal to set up, I feel it is a MUST have for painting.

And I want the shortest possible hose, 25 feet will usually get you around the car.
Sharpe sells a special low restriction hose and coupler set specifically for booths that is 35' long.

Be sure your water trap has at least a 1/2" or 3/4" preferably inlet and outlet.

Brian,just curious why you mention galvanized pipe.Over time it will rust inside.Why not copper instead?

Copper would be my choice also but I doubt that galvanized would rust enough inside in 20 or 30 years to hurt anything.
IF I was going to use Galvanized though, I would probably give it a littl pitch to drain so water isn't left standing in it.

Seen some slick new plastic piping that is safe for air line ( I've used pvc plenty) but this stuff has the screw together fittings and everything. Mike