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January 23, 2006

Lotteries as regressive taxes

Abbas has an interesting post at 3Quarks about the ethics of gambling.

Abbas argues that is gambling is morally problematic because it exploits near-universal human weaknesses in probabilistic reasoning. He thinks its bad enough when private businesses sponsor gaming for consenting adult customers. State-sponsored gambling he thinks is really beyond the pale.

State lotteries are often justified on the grounds that they raise money for social programs, especially those that target the neediest members of society. However, the poorest members of society tend to spend (and, by design lose) the most on lottery tickets. Some state lottery proceeds fund programs that benefit everyone, not just the poor. Often state lottery money is being systematically redistributed upwards--from lotto players to suburban schools, for example.

I'm ambivalent about state lotteries (and I don't know enough about the economics of state-sponsored casinos to have an opinion on those). I agree that state lotteries are unseemly for the reasons that Abbas points out. On the other hand, maybe the fun of playing the lottery combined with the revenue for social programs justifies their existence on the whole.

I know, lotteries exploit human weakness. Admittedly, I'm somewhat hostile towards people who buy lottery tickets. Or at least towards people who buy lots of lottery tickets. I can sort of see the entertainment value of an occasional Mega Millions ticket. But playing the lottery heavily is just stupid. I'm not saying that these feelings are morally or rationally justified. Really, I shouldn't care what consenting adults do with their pocket money.

I've always subscribed to the maxim that a lottery is a tax on idiocy. If people think it's fun to give their money to the government, I don't know why they should be stopped. People aren't going to stop gambling if the State gets out of the business. They'll just spend their money in the underground economy, or through private gambling establishments that will pay back a much smaller percentage of that money in taxes. I realize that this argument might be motivated by my aforementioned morally indefensible feelings of hostility, so feel free to discount it accordingly.

On the whole, I tend to think that the ethics of a State lottery depend entirely on the empirical details of the lottery in question.

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» Musings on the Idiot Tax from Rants for the Invisible People
Majikthise has written a musing on state lotteries, and their exploitation of those who need their pocket money the most. At one point, she mentions the lottery system as being a tax on idiocy. On this, I have been musing. Now, truly, ... [Read More]

» The Ethics of State Lotteries from Philosophy, et cetera
Government should not be in the business of exploiting the cognitive deficiencies of its citizens for monetary gain. Right? But state lotteries do just that, as Abbas at 3 Quarks Daily argues... [Read More]

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New show coming to NBC this summer:

Money changes everything for a group of 20 young adult friends who serendipitously pool their cash at a neighborhood party to buy and win a record $386 million lottery jackpot in the fresh new drama series "Windfall." Unfortunately, their initial ecstasy is tempered by the romantic, social and family complications caused by instant wealth.

Lindsay:

But do you think that most people who play the lottery are addicts?

No, I don't. But I do think the people who play the lottery the most are addicts. And it is vastly easier to take up playing the numbers than it was when organized crime ran it. I guess I am saying that more opportunities lets more who have a tendency to slide take a walk on the slippery slope. In the end maybe all I am reporting is a feeling: its dirty money.

You all should come to see Kentucky's General Assembly in session right now. They are debating the gambling issue hot and heavy.

Now... our state passed their lottery plan when Wallace Wilkinson was governor back in the 1988-1992 term. He ran his campaign solely on the lottery platform after surviving a brutal primary season. The lottery is it. It was promised to turn our education system around. Keep in mind that during his term our state education system was declared unconstitutional.

The legislature got hold of it and put it as part of the general fund. In their defense, education does eat up over half the state budget, which covers the lotterty. The lottery hasn't been the savior it was billed as. It has been a disaster and I don't think our state is any poorer than it was before but it's not much richer either.

Right now, the casino gambling debate rages on. Those who know about my wonderful home state know that gambling in the form of horseracing is a time honored tradition here with the beautiful, green spring meets at Keeneland or the legendary Kentucky Derby. Gambling is all a part of it. There's nothing more exciting than holding your tote ticket and watching your horse barrel around the final furlong trying get his nose in front of the others.

The casino gambling will bring in some tourism for places that don't have a race track. The state attorney general offered an opinion saying slot machines wouldn't be that much different than the lottery. So we're working on getting the gambling in.

Morally... I suppose I should have a problem with it but I don't. A Caesar's casino across the river from Louisville in Indiana doesn't bring in the pathetic gamblers on their last dime as it does in some communities. As someone who knows the place pretty well, it's a nice resort, it provides shows, good eating and a quality casino. I know of people who've lost hundreds of thousands in an evening(not me) and didn't sweat it. It's an entertainment place, no different than going to over priced movies, which by the time you go to a show you pay $8 or $10 a head for two people. If you buy drinks or popcorn or candy, another 20 bucks and that's not counting a nice dinner before or after the show. It could be $50 bucks easily... just to go to the movies. Morally... I don't have a problem with it. We grossly overpay for every other form of entertainment in our culture, I don't know why this should be any different.

excuse me? I was under the impression that most people tithed to their churches in order to fund the good works their church does, or to fund the church itself, and not for some sort of 'god jackpot'.

Anything having to do with funding a church, whether directly or through good works, is for the purpose of getting a reward from a god - either on earth or in heaven.

Old time Catholic indulgences are just a more blatant form of paying off god.

See the parable "Kissing Hank's Ass" which I originally discovered thanks to Lindsay.

http://www.jhuger.com/kisshank.php

The principle of paying a small amount now for a possible big win later is the same in the lottery or religion. Although it isn't a perfect analogy - most religions guarantee the big payoff if you follow the rules.

The thing about government run lotteries exist only because in most places, privately run lotteries are outlawed. I don't think in a free nation that the government should be interfering with someone's personal decisions. The argument is always that someone will gamble too much and so forth. So what? Hold on a minute, got to figure out what my bets, err investments I'm going to place with my online bookie,err, um, broker.
OK back to the argument, I think, using the prohibition on gambling argument, that we need to ban ice cream and candies, especially chocolate candies, because fat people might eat them. Obesity is becoming an epidemic, causing diabeties, premature death, hospital charges and so forth at a cost of $100's of billions, far worse than costs of gambling. We need the death penalty for candy peddling kingpins. I guess the only difference is that Jesus overturned the gambling table, not the dinner table.
Whoops, someone's at the door, what's that Mr. Gotti, yes sir, I'll tell them. Disregard the previous remarks, legal gambling is definitely bad (for revenues).

Regardless of how state-sponsored lottery proceeds are distributed, the lottery must be state-advertised to generate purchases of lottery tickets. Ask yourself: should a state spend money convincing its citizen to spend money on the lottery or spend money encouraging voluntary investment in tax-free education accounts, medical savings accounts, municipal bonds, etc.?

A certain number of lottery players and similiar gamblers (video poker) become obsessive and go bankrupt, destroy their families, etc. The "entertainment" theory has to keep them in mind too.

I don't think that simple misunderstanding of probability is the main cause of excess gambling. Superstition is a big factor -- gamblers seem to be unable to believe that gambling games are random and unpredictable and designed to take from 5% to 40% of your money.

I think that all gamblers keep a double set of books. There are ways of winning at blackjack and poker (if you're playing against worse players), but people will tell me that they have a system to win at the lottery or games of pure chance. They have to be fudging their stats.

Gamblers also seem to have given up on normal methods of attaining success, and to have chosen magical ways instead. (Or as above, "a tax on hope".) This really is irrational too, because a gambler who loses $20/week for 10 years would have a hefty chunk if he'd saved it. Gambling makes things more hopeless.

I think that there's a symmetry. Once the state has given up on payiong for services out of taxes, they put in a lottery and strip money from people who have given up on succeeding by normal means.

programs that exploit people's weaknesses? how bout them slick military ads,, they prey on people's fear of inadequacies,, fear of future employment,, fear of not having the necessary monies for post-secondary schooling,, fear of not measuring up to your dad's standards.

Lotteries are also a tax on hope.

I'm still frustrated at the amount of speculation about the mindsets of lottery ticket buyers. It seems like this is information that would not be terribly difficult to gather.

Also, I have a deep personal distaste for the phrase "tax on hope." Hope doesn't make people stupid or inherently thrillseeking. Lots of people with hope don't play the lottery.

I was a kid when the lottery and the "pick 3" were enacted in Pennsylvania. We had quite a large mob presence in Philadelphia, and a state gambling program was seen as a way of cutting into a huge revenue source of theirs. I'm sure many places had the same situation. It seems like a perfectly reasonable solution. It is essentially a realization that we will not stop illegal gambling, but we can channel some of it to better purposes.

What I don't understand is all of the advertising. Every ad for every lotto, pick 3 or scratcher or whatever is immoral. The state creates a monopoly for an activity that it deems undesirable so as to prevent criminals from gaining cash while engaging in that activity. It then promotes that activity to create more wealth for itself.

Re Abbas' statement "This creates the impression that the rich are rich because they are lucky (and some of them are) and you could be too by winning the lottery, not because they worked at getting an education, or invented something, or were good entrepreneurs, or whatever." A very large share--if not majority-- are lucky, in the sense that they've been fortunate enough to be born into rich families.

I think that maybe we should privatize lotteries, but put a tax on them, either their profits (say, 50% of profits) or their base price (say, 10% of base ticket price).

I don't think that, in general, states should be running businesses. There may be exception, of things that COULD be privately run, but shouldn't be (schools, for example), but generally I think that government-run enterprises should be held guilty until proven innocent (and, with enough evidence, such as with healthcare, an "innocent" verdict can still come through).

Posted by: Abbas Raza | January 23, 2006 at 07:23 PM

It's on Idiocy, because the statistic of lotery winning is well understood. One can say 'hope' if the winning probability is not well understood. (ie. there is hope)

The smarter fellow know what is the chance of winning, and that loterry is playing on people emotion of 'enormouse promise for a small entrance fee'.


If it is for eg. cure for cancer, where the outcome probability and mechanism are not well understood, then one can talk about 'hope'

Hope doesn't make people stupid or inherently thrillseeking. Lots of people with hope don't play the lottery.

Posted by: Eli | January 24, 2006 at 09:54 AM

exactly. Lottery is banking on stupid people not understanding the statistic of winning lottery. The mechanism and chance of winning are clear and well understood.

Plus, if all a state want is 'do some good' then why not do some other voluntary taxation system? Instead of calling it 'game of chance' then giving it moral foundation as 'it does good for the people'

Eli is right that the advertising is the real moral issue in State organized gambling. People will gamble, just like they will use drugs and have sex. It is probably better that the States control gambling than leaving it to organized crime. The States at least will not allow betting on money borrowed from the States.

But, to increase demand by advertising to adults, teens and children is indefensible. It provides a level of social acceptance that the behavior would not otherwise have. If tobacco and alcohol ads can be banned, then so can gambling ads.

First, I think we can distinguish between slot machines and poker. If you enjoy playing poker, then you're paying for that enjoyment. However much money you sit down with is how much it's worth to you.

The other difference with (live) poker is that someone will win. There is money at the table that is going home with someone. Over the long haul, there will be a winner. At pretty much any other table or machine you can sit down at at a casino, excepting a very few lucky jackpot winners, over the long haul everyone's going home a loser.

You can argue over whether it's skill or luck or whatever combination of both, but poker has at least that much going for it.

Add: In that way, at worst, poker is basically a lottery between eight or so people. Much better odds. (Unless you're just hopelessly over-matched, I guess.)

Squashed Lemon writes: Lottery is banking on stupid people not understanding the statistic of winning lottery.

No, it is not. Why do you keep saying that? People know damn well that they are not likely to win the lottery. As I said, they may not know the exact expected payoff, but they know that they personally are not likely to come out ahead. So calling it "stupid" is itself...well, I don't want to be insulting; let's just say that it's incorrect.

And the statistics have nothing to do with it. When someone buys a lottery ticket, he is paying for the chance to get rich. And that's what he gets: a chance.

Now, it is certainly the case that there are much, much better things that the poor can do with their money. That's the sort of information that the poor can use, not patronizing lectures about probability theory. Suppose someone spends $100 a month on lottery tickets (I don't know if that's a good estimate or not). What can he do with that $100? He can eat a little better, he can save it (towards what, though?), he can wear a little nicer clothes, live in a slightly nicer apartment. It's hard for people to visualize what they can do, constructively, with small amounts of money.

Things are different in some other places in the world. In some countries, $100 is enough to start a small business, or to make an improvement to an existing business. That's why microloans are so successful, and can be such a rewarding use of aid money.

Talk to anyone who works with homeless people about lotteries. My father ran a foundation for the homeless for many years, and he'd give you an earful.

Lotteries create a situation in which desperate people are constantly confronted with a perceived opportunity to improve their lot. Consider a person who's buying a small batch of groceries, and mindful of overdue bills. The temptation to buy $5 worth of scratch-offs can be overwhelming when the person considers that a win might make it possible for her to buy a new jacket for her child to wear to school. For a poor family, those $5 "investments" add up quickly.

You can't say that this person would just call a bookie or go to the track if the lottery weren't available. Study after study show that state lotteries increase the incidence of gambling. The more available gambling opportunities are, the more gambling people do. And lotteries create gambling opportunities in every supermarket and mini-mart.

I see a lot here about returns to the state. Keep in mind that the very people that state services support are being most harmed by lotteries. If the parents of a child become homeless, how much will extra revenues to the schools mitigate the impact on that child's education? How much will extra revenues for housing subsidies mitigate the impact of creating another homeless family?

It's all well and good to talk about "entertainment," "hope," and "idiocy." The fact is, though, that the real impact of lotteries is that they inflict severe damage on some families in order to provide marginal good to others. That's not the proper role of government.

Eli writes: Also, I have a deep personal distaste for the phrase "tax on hope." Hope doesn't make people stupid or inherently thrillseeking. Lots of people with hope don't play the lottery.

Hope is about visualizing a path to a brighter future. For some people, winning the lottery is the only path they can visualize.

gordo writes: It's all well and good to talk about "entertainment," "hope," and "idiocy." The fact is, though, that the real impact of lotteries is that they inflict severe damage on some families in order to provide marginal good to others. That's not the proper role of government.

You are exactly right. There are two different issues being discussed: The first is the psychology of why people with very little money gamble. I think it is wrong to say that it is ignorance or stupidity. The second is whether gambling should be legal or state-funded or promoted, or whatever. When I say that I understand (a little bit) why people gamble, that doesn't mean that I think it should be encouraged.

Lindsay writes: But do you think that most people who play the lottery are addicts?

When there is no physical dependency involved (such as cocaine or heroin addiction), it seems to me very difficult to distinguish "addiction" from general "weakness of will". Why do people do things that they rationally know are ill-advised? Calling it an "addiction" is just stamping a label on the phenomenon, it isn't explaining it.

The general problem is that people don't act wisely, even when they know the facts. People eat junk food even if they know it is unhealthy. People watch TV instead of going for a walk. Giving people extra information about the wisdom of their choices doesn't necessarily lead to better choices. So calling gambling "idiocy" or "stupidity" or "ignorance of probability" doesn't really cover it. It's not simply a matter of not understanding the facts (although that might be a part of it).

No, it is not. Why do you keep saying that? People know damn well that they are not likely to win the lottery. As I said, they may not know the exact expected payoff, but they know that they personally are not likely to come out ahead. So calling it "stupid" is itself...well, I don't want to be insulting; let's just say that it's incorrect.

Posted by: Daryl McCullough | January 24, 2006 at 01:59 PM

No, they are not. Average folks has some vague concept. But they are not aware.

Compare this to say: if one doesn't bundle up during winter, they have sense the probability of catching cold.

Same with some other common occurance.

But lottery statistic is VERY large. Ones impression is based on 'oh I read it in newspaper, somebody got $3 Million bucks two years ago.) ... or if I buy lottery every week, I will win.

...etc etc...

but they know that they personally are not likely to come out ahead. So calling it "stupid" is itself...well, I don't want to be insulting; let's just say that it's incorrect.

Posted by: Daryl McCullough | January 24, 2006 at 01:59 PM

my speculation: I am pretty sure, modern lottery, spcially those scratch off one is designed to balance between 'word of mouth of prize reward vs. size of reward occurance)

if we are talking about those 7 or 11 numbers lottery, I seriously doubt any of us can say what exactly winning 1 in 35 million chance means aside from some abstract explanation. None of us has built in natural sense for that sort of thing.

That's what I call stupid. (as oppose to knowledgable/not well informed)

Our brain reward/pleasure system is not wired to handle that sort of winning sensation/teasing.

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