Evan Soltas
Mar 26, 2012

End State Lotteries

A tax by any other name wouldn't be as regressive

Lottery tickets
Felix Salmon, Reuters' finance blogger, drew merited attention on Tuesday to the perversity of state lottery systems in the United States -- I don't think I've ever written about why I find it such a terrible idea on this blog, but Mr. Salmon does a wonderful job:
[T]here [is] a dark side to the lottery...It’s a horribly regressive tax on poverty, for one thing...It really is a voluntary tax. But the problem is that it’s paid overwhelmingly by poor people who can’t afford it, rather than by rich people like me who can.
This is well documented in research. Despite the variety of "inspirational" slogans employed by state lotteries, the lottery is actually a significant cause of poverty in the US.

I'm not kidding. Households with an annual income of under $13,000 spend on average 9 percent of it, or $645, on lottery tickets. 9 percent of their income. Just think about that. A reminder: the savings rate for such families is close to zero. If the states subsidized and marketing savings plans to the poor with the funds and zeal they now use to sell lottery tickets, then the poor would be on the road to a better future, although perhaps not the immediate prosperity the lottery uses as a lure.

There is also evidence that those who fail to graduate high school, even after accounting for income, are far more likely to buy lottery tickets than the educated.

The marketing slogans used by lotteries are most effective on those who feel their income is low relative to their peers -- this is perhaps intentional and rooted in the exploitation of the "gambler's fallacy" in lottery-ticket buyers. (It would be interesting to do a study to see just how well correlated the bad thinking of this fallacy and lottery ticket purchases are.)

Salmon also points to a significant crime concern created by lotteries -- apparently, they facilitate money laundering -- and I would add that it does the same for gambling addiction. A fair comparison would be if the state began marketing alcohol, tobacco, and firearms in inner city neighborhoods, people would raise a hue and cry. Moreover, the state writes itself a huge loophole into normal consumer protection laws to market the lottery; imagine if tickets came with the same sort of graphic warnings that will now appear on tobacco products in the United States. They should.

Salmon has a fatalistic attitude towards the whole thing, writing that lotteries are "here for the foreseeable future." They are not as long-standing as I thought. Lotteries were illegal in every state until 1964, but by 1989 were established in most states (see the study I linked to about education and the propensity to buy lottery tickets).

I don't buy the argument (advanced here) that the poor or compulsive gamblers are better off playing the state lottery, as opposed to the alternatives they would seek out if it were ended. The average return on lotteries for the player is 50 percent of the amount gambled, which is far worse than the 97 percent payout rate at private casinos.

People should be free to gamble, even if it is with what little they have, though. A private market for lotteries, which would likely raise the payout rate closer to the industry standard, as long as there was the appropriate consumer disclosures and protections, would be a great improvement. Trying to ban lottery itself is likely to create more problems than it will solve and is arguably an infringement upon personal freedom.

I'd appreciate it very much, should you agree, if you could leave a little comment stating as much. The state lottery gets me worked up like very few other political issues.