March 16, 2012

Lotteries and Government Larceny

Not happening, but not the point.

Full disclosure:  I play the lottery from time to time - probably a couple of times per month.  Even though I have a pretty decent income, I'm in the same boat as a very significant portion of the population in that I'm living paycheck to paycheck.  While I am not in an overly expensive house or living beyond my means, I don't have a lot of room for unexpected events and I have not nearly enough retirement savings.  The lottery is a pleasant diversion into hope for a better future, and a way to look beyond my economic circumstances.  I know the reality of a lottery win of any substantial amount is a ridiculously low probability.  Yet I still play because of that glimmer of hope.

But there's a couple of differences between the lottery I play and the lottery you are likely to play, and it boils down to the type of government larceny that you face is different than the government larceny I face.


Governments know that the lottery thrives on hope.  In fact, they prey on that very emotion, just as casinos do. (The difference between the government lottery and a casino is even more vivid than the differences between your lottery and mine).  


A lottery is essentially a voluntary tax.  In other words, lotteries generate a revenue stream for a government.  When you play say a Powerball lottery, you are buying an opportunity to win a large amount of money.  The money you and millions of others spent to buy tickets, goes ultimately to the government sponsoring that lottery, minus the percentage that goes winners (and that typically represents a fraction of the overall revenue stream), and any operating costs of the lottery.  You lottery ticket purchase is a voluntary form of payment to the government - a voluntary tax.

Therefore you are paying a tax, using income you have already paid tax on.  That's bad enough, but it gets worse.  I mentioned that there is a difference between casinos and government lotteries.  Casinos tend to return a higher percentage of their take back to their customers as winning than government lotteries do.  The government keeps a higher share for itself?  Why?  It's a monopoly.  Casinos have competition.  If you set up a casino and keep on average 99% of the money spent on games while other casinos all only keep 2%, you'll quickly lose all of your customers to other casinos once the public catches on that no one ever wins in your casinos. The government doesn't have that worry so they can be greedy, as they are wont to be.

Are you a lottery dupe?
But it still gets worse.  I mentioned that my government larceny is likely not as bad as yours.  There are two reasons for that.  (1) Lottery winnings are taxed and (2)  Lotteries are paid out in annual or monthly payments over a period of years or if you take a lump sum payment the amount is significantly reduced. That's for you, not me.  I'm in Canada and our lotteries are not taxed, and the payouts are immediate and at the face value of the win.  If I were to win $30 million today, I could collect that exact amount today.

The fact that your winnings are taxed (a third tax on your 'investment') is practically criminal.  And worse, the government applies an accounting/finance principle known as Net Present Value.  They have agreed to pay you out over 20 years.  Some of the money you won you'll receive 20 years from now.  Let's say it's $1 million.  That $1 million portion is worth more if you collected it today than if you waited 20 years to collect it.  That's because of inflation. $1 million today may be worth only say $400,000 in 20 years depending on inflation. You are being short-changed by waiting for your money.

Meanwhile, the government which collected the lottery ticket purchase monies in today's dollars, can hold on to 95% of the winnings and invest it at a rate of return and make money off of it.  They'd rather they have that option than you, so if you elect to collect now you get a reduced amount to reflect their forgone opportunity.  

It makes sense from their perspective but clearly the government has not missed a single turn to take advantage of your dreams.  Not only is it larceny, it's predatory.  And this from state governments which have typically overspent and have themselves become addicted to the income stream supplied.  Governments do not self-regulate, particularly when it comes to spending.  The easy out for them is to keep looking to these revenue streams for more.  While they promise more and more and participants in the lottery tend to be those who most need to hold onto their income, the cycle of dependency and lottery addiction only tends to worsen over time, and people become more and more desperate.

It's an ugly picture, unless you win. And despite that, both you and I will probably continue to play. That's just a sign of how far off track things really are.


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