Mitchell: Government gambling versus the poor

Daniel J. Mitchell

Like any sensible person, I want victimless crimes to be legalized. In part because I believe in freedom, but also for utilitarian reasons.

I do not approve of drugs and I’ve never used drugs, but I think the social harm of prohibition is greater than the social harm of legalization.

I do not particularly like alcohol and I am almost a teetotaler, but I’m glad there’s now a consensus that the social harm of prohibition was greater than the social harm of legalization.

I do not approve of prostitution and I’ve never consorted with a prostitute (other than the political ones in DC), but I think the social harm of prohibition is greater than the social harm of legalization.

So it will not surprise you to learn that I want gambling to be legal because the social harm of prohibition is greater than the social harm of legalization.

But that definitely does not mean I want government to be in charge, which is why I’m not a fan of state-sponsored lotteries.

Joe Setyon, in a column for Reason, points out that politicians are the only group that actually benefits from these schemes. He writes, “there are a few things us suckers need to keep in mind about the lotto. First, the majority of lottery revenue goes back to the government …. In Texas, for instance, most forms of gambling are illegal. This means the government has a near-monopoly. The double standard for public and private gambling operations is obvious. Ultimately, the lottery system is a kind of regressive tax on low-income earners.”

And here’s an article from CNBC that reveals the unpalatable tax consequences for the “lucky” people who happen to win a big prize.

“… there’s at least one guaranteed recipient of a chunk of the loot ­– the IRS …. If you happen to beat the astronomical odds and hit all winning numbers in either game, be aware that the taxation of your prize starts before even reaching you.”

In other words, the government pillages people when they buy tickets.

And then the government pillages the tiny fraction of people who actually win something.

As I wrote above, the only real winners are politicians.

The biggest losers, by the way, are poor people.

Arthur Brooks of the American Enterprise Institute summed up this sad state of affairs in a column for the Wall Street Journal:

“Powerball – the lottery shared by 44 states, the District of Columbia and two territories – is just one of the sweepstakes run by 47 jurisdictions in the U.S. These games produce nearly $70 billion a year in government revenue and enjoy profits of about 33 percent – much higher than margins in the private gambling industry. Who are these lotteries’ most loyal customers? Poor people.

Here’s some additional analysis from the Wall Street Journal, this time from Holman Jenkins:

“Gambling is what economists call an “inferior good” – demand is higher among those at the lower end of the income scale. As economist Sam Papenfuss argued in a 1998 paper, state-sponsored gambling became popular as a way for high-income taxpayers to recoup some of the money spent on programs for the poor.”

Last but not least, here are excerpts from a column I wrote for the Washington Times more than 20 years ago:

“If nothing else, lotteries show how much better consumers are treated by the free market system. Private gambling operations pay out about 90 cents for every dollar wagered (even higher for games such as blackjack), a far better deal than the miserly return provided by government-run lotteries …. This analysis applies to illegal gambling as well. Bookies traditionally allow customers to bet against the point spread for sporting events, and they make their money by applying a 10 percent charge on the money wagered by those who make losing bets.”

Two decades later and I would not change a single thing I wrote.

I do not like when politicians mistreat rich people, but I get far more upset when they do things that impose disproportionate costs on poor people. This is one of the reasons I do not like government flood insurance, Social Security, the Export-Import Bank, the mortgage interest deduction, or the National Endowment for the Arts.

And lotteries definitely belong on that list as well.

I’m not a paternalist. I support legal gambling and I do not want to prohibit poor people from making (what I think) are misguided decisions.

But at least leave the gambling to the private sector so poor people will get back, on average, 90 cents of every dollar they bet.

Daniel J. Mitchell, chairman of the Center for Freedom and Prosperity, is on the Editorial Board of the Cayman Financial Review.