Why the Lottery is a Regressive Tax


TPOH is as fascinated by the lottery as anyone, even though there's only a small relationship between the lottery and happiness (or lack of). Indeed, entire studies have been undertaken that demonstrate that winning the lottery does not make people fundamentally happier. The high of winning wears off in about six months.

Still the dreams are fun to dream, right?

But the dream-weaving encouraged by the government-run lottery has a nightmarish impact on the people who can least afford to gamble on it.

Lots of folks buy the occasional ticket, but studies have long shown a steady association between poverty and lottery play. Many scholars report that the poorest third of Americans buy more than half of all lotto tickets, which is why states advertise so aggressively in poor neighborhoods.

Harmless entertainment, you may say, but poor people don’t see it that way. They tend to view lottery tickets as an investment. Duke University social scientists Charles Clotfelter and Philip Cook reported in a 1990 study that people earning less than $30,000 a year are 25% more likely to say they play the lottery for the money rather than the entertainment.

Hardly a surprise, since this is the idea that lottery advertising is selling. In California, the slogan is, “Imagine what a buck could do!” In New York? “Hey, you never know.” Scholars have dug up evidence that states intentionally direct such ads at vulnerable citizens. A marketing plan for Ohio’s lottery some years back recommended scheduling campaigns to coincide with the distribution of “government benefits, payroll and Social Security payments.”

The odds of winning the Powerball lottery are roughly 1 in 292 million, and the government takes a nice healthy chunk of the winnings before the payout. Yet people with lower levels of education may not realize how bad the odds and the returns are.

On top of it all, a lottery win is completely random so it makes little sense to try to buy tickets at a store that has sold a winning ticket previously. Yet, it happens - a lot and more so in areas with high rates of high-school dropouts and households on welfare.

What’s the social cost of all this? (Economist Melissa) Kearney says lottery players finance their tickets largely by cutting spending on necessities. After a state introduces the lotto, the bottom third of households shift about 3% of their food expenditures and 7% of their mortgage payments, rent and other bills. Effectively, the lottery works like a regressive tax.

It might strike you as bizarre that the government spends billions on nutrition and housing programs for the poor while simultaneously encouraging poor people to move their own money away from these necessities and toward the state’s gambling monopoly. In fact, that $70 billion in annual lottery revenues is strikingly close to what the government spends on food stamps. Is there any set of policies more contradictory than pushing lotto tickets on poor people, and then signing them up for welfare programs that make them financially dependent on the government?

So, what's the government's upside for holding a lottery, and should there be rules about how much people can play? Tell us your thoughts.