How The Government Gets Away With A Monstrous Hidden Tax On The Poor

Photo: Flickr/moriza

In recent posts I argued that current tax policy for the wealthiest people in the United States incentives inheritance over effort, encourages getting ahead either from:

  1. Gifts from Daddy or
  2. Living off your wealth,or
  3. Owning a hedge fund,

…all the while punishing people who actually, you know, work for a salary to achieve the American Dream.

In response, many outraged readers commented that the poorest Americans pay no income taxes, and that the real injustice wasn’t Richie Rich starting out life with $10 million tax free, but rather that Welfare Queens and moochers were living high on the hog of their $28,000 in annual transfer payments, off the sweat of the brow of the upper classes.

Ah, but dear outraged reader, do not worry and do not be alarmed – the poor do not slide by tax free.  No, no, no.  If those poor people want good schools and good roads, our leaders have devised extraordinary measures to tax people who pay no income taxes.

Moreover, taxes on the poor have been rising steadily in the past two decades.  What is this hidden tax?

Lotteries!  Casinos!  The great thing about lotteries and casinos is that the government can capture significant revenue[1] from those Welfare Queens and moochers, without having to raise taxes on the wealthy to pay for stuff like, you know, schools and roads.[2]

Indeed last night’s extraordinary Powerball drawing reminds us that governments constantly levy hefty taxes on poor people, especially poor people who are bad at maths.[3]

Lotteries, which generate state revenue of approximately 30 cents for every dollar spent by purchasers, implicitly tax participants much more heavily than other revenue sources, between 25% and 56%.

As I wrote before, what I really find offensive about the abolition of the estate tax and the loopholes for the wealthy is the message that government leaders implicitly send about the value of work and government-incentivized methods of accumulating wealth.[4]  Likewise, what I really find offensive about lotteries and casinos is the clear message from government leaders to the poor about the way to get ahead in life, and the way to accumulate wealth.

The implicit message of taxation through lotteries and casinos is the following: Never mind trying to work for a living.  It’s best for you to try to reach the American Dream through pure dumb luck: the roll of the dice, the spin of the wheel, the turn of the card, or the scratching off of the ticket.  Money is best made not by discipline, sacrifice, intelligence, education, or work, but rather by playing a game, secretly knowing that the odds are rigged against you and that you’re going to lose anyway.

That’s our hugely regressive tax policy for the folks who don’t pay income tax.  That’s the message to poor people from our leaders rushing to promote lotteries and casinos.[5]

[1] States collected close to $18 Billion in revenue from lotteries in 2010.

[2] How, besides common sense, do I know poor people pay these Lottery and Casino taxes in disproportionate numbers?  Great stats and facts accumulated here.  To highlight a few: 1. Instant tickets in Texas were more likely purchased by someone out of work than someone working or retired.  2. 49% of Californians without a college degree play the lottery, versus 30% with a college degree.  3. 54% of lottery players in South Carolina earn less than $40K a year, although they account for 28% of the state population.

[3] Of course, last night’s estimated $580 million Powerball lottery payout was exceptional – in that the expected value of $1 spent on a lottery ticket was actually positive – an unusual case.  The government still seeks to tax the poor with this lottery, but at least it wasn’t, for this brief instance, taxing both the poor and the innumerate. 

[4] To be specific about that message:  “The best way to get wealthy is to be born in to the right family.  The best way to earn a living is to have your money make money for you.  The best business you can set up is a private equity or hedge fund, as we will give you generous tax breaks on your income if you do that.”

[5] Also of course the fact that I bought two Powerball tickets and did not win has fuelled my anti-lottery feelings this morning.  Go ahead, call me a hypocrite.  I can take it.

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