Nova workboard

a blog from young economists at Nova SBE

State lotteries – a regressive taxation of the poor

A lot of countries, like Norway and the US, have state lotteries. At first glance this might seem like is a win-win situation: players are entertained by the lottery, and the government receives funding for public projects that benefit the entire population. As an example of the benefits for the population, Norsk Tipping, the Norwegian state owned lottery, made profits of approximately 500 million euros in 2013, all given back to the community. However, if you think more carefully about who plays the lottery–and why they play–this win-win situation does not hold. On the contrary, state lotteries can be seen as a regressive taxation on poverty.

To see this, let’s start with the odds of winning. For most people it is apparent that the chances of winning the lottery are dim. To illustrate, the chance of winning the American “Powerball” lottery is 1:175 000 000. As an article in the New York Times states, you are roughly as likely to win the Powerball lottery, as you are to being hit by lightning on your birthday. This implies that the lottery should mostly be played for the fun of it. However, this is not always the case.

Studies have shown that people with low income are more likely to see the lottery as a financial investment, and relatively less likely to play for entertainment. This “investment strategy” might be due to the fact that poor people have fewer investment opportunities, and that the lottery ticket gives hope of a better future. Nevertheless, this does not change the fact that for the average person, rich or poor, the lottery will be a bad financial investment. For the government however, lotteries can be seen as a way of collecting taxes.

When poor people play the lottery for financial gain, we see that the win-win situation presented earlier gets distorted. The win-win situation implied that the players played the lottery for entertainment, and hence received some satisfaction from playing, no matter the outcome. When someone instead plays the lottery as a financial investment and lose their money, we no longer have a win-win situation.

The win-win picture gets further distorted when we see who are more likely to play the lottery, and how much they spend. Several studies have shown that people with less income are more likely to play the lottery than those with higher income, and that they also spend a higher average amount on lotteries. For example, a study at Cornell University, cited by Wollf, found “a strong and positive relationship between sales and poverty rates”. Adding that poor people already earn a relatively small income, the financial impact of playing the lottery can be quite large for this group. According to a news article in AlterNet, a 2010 study showed that households with an income of less than $13.000 per year spent an average of 9 % of their total income on lottery tickets.

Just the mere fact that a ticket will be relatively more expensive for a person with low income implies that we have regressive taxes on poor. That is, the purchase of a lottery ticket takes a larger percentage of income from low-income people than from high-income people. Moreover, and also more importantly, the taxation of the poor is amplified by the fact that more low-income people play the lottery than those who are wealthy, and that the low-income group also spends more when playing. As Wolff put it, “the richer escape the disguised taxation by not buying the tickets”. Hence, the taxation does not only hurt the poor to a greater extent, the poor people also contribute more in total taxation. Combining the fact that lottery purchases increase as poverty and unemployment rates increase, the effects of lotteries for a country in financial crisis such as Portugal can be quite perverse, knowing that we are basically taxing those who need financial aid the most.

1992

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Author: studentnovasbe

Master student in Nova Sbe

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