Voluntary Taxes

May 31, 2012 — 1 Comment

In the US, lotteries are subject to the laws of each jurisdiction; there is no national lottery.
Private lotteries were legal in the early 19th century, and before the advent of government-sponsored lotteries, many illegal lotteries thrived. The first modern government-run US lottery was established in Puerto Rico in 1934, followed by New Hampshire in 1964; today, lotteries are established in 43 states, the District of Columbia, Puerto Rico, and the Virgin Islands; The most recent US lottery to be legalized was in Arkansas; its voters approved a lottery in the 2008 election.

The first modern US joint lottery game was formed in 1985 in Maine, New Hampshire, and Vermont. In 1988, the Multi-State Lottery Association (MUSL) was formed with Iowa, Kansas, Missouri, Oregon, Rhode Island, West Virginia, and the District of Columbia as its charter members; it is best known for Powerball, which was designed to create large jackpots. Another joint lottery, The Big Game (now called Mega Millions), was formed in 1996 by six other lotteries as its charter members.
Instant lottery tickets, also known as scratch cards, were introduced in the 1970s and have become a major source of lottery revenue. Some lotteries have introduced keno and/or video lottery terminals (slot machines in all but name).

Individual lotteries often feature three-digit and four-digit games akin to “numbers games”; a five number game game, and a six number game (the latter two often have a jackpot.) Some lotteries also offer at least one game similar to keno. Presently, many US lotteries support public education systems.

Americans may favor raising taxes on the rich (at least according to some polls), but apparently that stance doesn’t cross over to lottery winners. Brian J. Gaines and Douglas Rivers explain the odd discrepancy in the Wall Street Journal–

Polls often show that the public favors raising taxes on “the rich,” “millionaires” or “families earning over $250,000.” Last year, billionaire Warren Buffett demanded that we “stop coddling the super rich” and impose higher tax rates on incomes over $1 million per year (and higher rates still on incomes over $10 million). President Obama and most Democrats have endorsed raising taxes on high earners. …

In February, the online pollster YouGov asked a representative sample of 3,500 American adults what they thought would be a “fair amount of tax” to pay on lottery winnings. The survey specified different amounts of winnings, ranging from $1 million to $100 million. …

Less than a quarter of respondents chose a tax rate of 30 percent or higher on any level of lottery winnings. The vast majority thought that a reasonable amount to pay was much lower, with the average being only 15 percent. Democrats and Republicans differed only a little: The average rate preferred by Republicans was 14 percent, compared with 17 percent for Democrats.

If anyone should be paying exorbitantly high taxes, shouldn’t it be a lottery winner, at least according to Elizabeth Warren’s “pay it back” theory? Their financial windfalls are completely comprised of other people’s money for which they personally provided no goods, services, or societal benefit in exchange. Lottery winners didn’t work 80 hours a week for years to accrue that money. They didn’t employ hundreds of workers, and provide health care and livelihoods for their workers’ families. They didn’t risk their personal assets, reputation or self-worth.

So why do Americans seem less eager to tax lottery winners than traditional millionaires? Gaines and Rivers provide a good theory:

How do we reconcile these findings? Is it because lottery jackpots are the stuff of dreams? Critics scoff that lotteries are a (voluntary) tax on innumeracy, and probably many ticket buyers do fail to understand just how minuscule are the odds of winning the eye-popping prizes. Yet people who don’t expect ever to become rich by hard work or careful investment might still daydream about being showered with cash by a megafluke. The wild improbability of lottery wealth might even be why our respondents like such low tax rates.

It’s a fact of life – and an understandable one – that a mailman or a public school teacher who plays the lotto every day thinks he has a better chance of becoming fabulously wealthy by scratching a ticket than through earned income, investment or inheritance. So these people are more likely to identify with the small group of lottery winners than with the much larger portion of Americans who became rich through traditional means.

Trackbacks and Pingbacks:

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