Gambling as Taxation of the Poor

Paper presented at the EASG conference, Barcelona, 4.10.2002. Hans Olav Fekjær.

In yesterday's plenary session, we heard the gambling industry talk about "the need for gambling", as if the gambling industry is only meeting one of the natural needs of human beings. But Brian Castellani, in his book on patological gambling, states that in no American states, the legalizing of gambling has been the result of populat demand. Legalization has always been the result of pressure from either the gambling industry or the authorities, charities or other beneficial causes receiving money from gambling.

In one of the paralell sessions yesterday afternoon, David Miers from Great Britain told us that the governmental committee on gambling did not receive one single letter from any consumer group asking for more gambling opportunities, but several from consumer groups wanting fewer gambling opportunities. He concluded that legalized gambling is "an industry-driven, government-driven event".

In general, the treasuries in most countries dislike the idea of targeting or earmarking revenues for specific purposes. The Treasuries do not even accept logical kinds of earmarking, like setting petrol revenues aside for road construction or targeting alcohol revenues for prevention or treatment. There is one single exception from this rule: Gambling revenues are set aside for specific popular causes.

But are gambling revenues really used for these spesific causes, and who pays the bill?

My own country, Norway, is number one in the world in lotto expenditure per capita, and the state lottery also has a lot of sports betting and instant lotteries. The huge profit from the state lottery is, in principle, divided between one third for sports, one third for research and one third for cultural purposes. The earmarking for sports is genuine, but the profit allegedly earmarked for research and culture disappears into the treasury like any other taxes or duties. The earmarking can hardly be characterized as genuine.

We might assume that profits from the state lottery gives the state a moral obligation to fund research and culture. But in spite of the state lottery, the state still allocates less funding for research than our neighbouring Nordic countries, with which we always compare ourselves. Would even smaller amounts have been allocated to research if the state did not receive profits from the state lottery? Or does the state lottery only allow the state to reduce or avoid increasing taxes and duties, or does the state lottery even allow the politicians to spend money for unpopular causes like raising politician's salaries?

When American states have liberalized gambling, the main argument has been that the profits will be used for improving the quality of schools or health services. But the commission appointed by the federal Congress could not, in their "National Gambling Impact Study" demonstrate that gambling revenues actually had improved schools and health services.

One example: Before the state of Florida established a state lottery to improve the schools, 60% of the state's budget was allocated to schools. After 5 years with state lottery, the proportion had been reduced to 51 %. The National Gambling Impact Study commission said:

"The problem with a lottery is that lottery profits are used as a substitute for tax dollars, not as a supplement to them."

An analysis in the journal Current Sociology (2001,5:1-15) concluded that the groups that have really profited from the liberalization of gambling are the middle and upper classes, which without gambling would have been forced to pay more in taxes and duties.

Thus, earmarking the gambling revenues for good purposes may seem to be a cover for only increasing the tax on a certain part of the population, the gamblers.

Why, then, is legalization of gambling always based on the claim that the profit is allocated to specific, beneficial purposes?

I think the reason is quite obvious. Gambling, even if the "b" and "l" are omitted so the term "gaming" is employed, is a risky activity which leads many individuals and families into tragedies. Gambling has a weird effect on the thinking and behaviour of many otherwise sensible, responsible individuals. But politicians want to get popular and become re-elected. To avoid raising taxes, they may use gambling. But if politicians legalize a risky activity as gambling, which predictably leads to tragedies, they have a need for legitimation to make gambling acceptable. They need to point at advantages that apparently outweigh the problems resulting from gambling. The advantages may be schools, health services, charities or other beneficial causes.

Yesterday, Bill Eadington talked about "the increasing public acceptance of gambling". The apparent targeting of gambling revenues seems to play a key role in gaining public acceptance.

The treasury and politicians sometimes refer to gambling as "voluntary taxation". But is this term correct? Some studies indicate that among approximately 5% of the gamblers, supporting av beneficial cause is one of the motives for gambling. And I suspect that these 5% are not the heaviest gamblers.

Gambling may well be seen as the very opposite of voluntary taxation, as a method of collecting involuntary contributions to beneficial causes, given for the dellusive purpose of personal profit. Organizers of legal gambling face the task of designing the gambling in such a way that the gambler gets the illusion of fairly good chances of winning.

In order to create illusions about winning, slot machines and instant tickets are often designed with frequent "near misses", producing a false feeling that to be close to the big prize. Mark Griffith's research has demonstrated that near misses give a similar physiological reaction as real prizes.

The totalisator principle, which determines the size of prizes in horse betting and football pools ensures that experts win more frequently, but with correspondingly smaller prizes. Robert Ladouceur's research has demonstrated that skills and know-how do not increase the financial outcome in the long run. All the striving for developing expertise on horses or football is - from an economic viewpoint - totally wasted.

Odds betting gives advantages to the experts, but the experts also loose in the long run. The CEO of our national lottery has told me that the real experts among their customers gets a return of 92%.

Many Internet gambling sites offer a free demonstration which gives frequent prizes. The intention is, of course, to motivate people to gamble with real money. But then, another program is used, where prizes are rare.

Lotto has become the most widespread kind of gambling. In its predecessor, the passive lottery, the random outcome seems to have been to obvious. But lotto gives the paticipants the opportunity to choose the numbers themselves. Research has demonstrated that lotto customers really believe this increases the chances. The self-picked numbers open up for belief in "lucky numbers", which of course is a pure illusion. No matter which numbers are chosen, each row of lotto numbers will, in my country, give a first prize every 96 155th year.

But the marketing seldom tells the customers about the real chances. The marketing of most forms of gambling focuses exclusively on the extremely improbable large prizes. It says that "You may become a millionaire!", without trying to explain the astronomical odds. In my country, the state lottery company has taught the population that winning at lotto is an enormous event. People often say that "I'll do this, buy that and travel there when I win at the lotto". But in reality, more than 99% of the prizes amount to less than 40 US dollars.

All lotteries have a large number of prizes which are so minute that they are practically worthless. The most frequent prizes often corresponds to the average player's stakes. Their main function is probably to give the player a false feeling of being close to the large prizes.

The marketing's one-sided focus on top prizes make people employ a peculiar way of reasoning in relation to lotteries. When buying shares at the stock market, people scrupulously analyze the probabilities, in contrast to their way of thinking when buying a lottery ticket, where the whole reasoning is restricted to "I may win, I may win the big prize".

A Danish colleague has characterized gambling as "a punitive tax on those who do not understand statistics and the laws of probability". This punitive tax especially hits people with a low educational level. In my country, the state lottery company publishes the names of their 27 best among our 400 municipalities. All these municipalities have a lower than average level of education. In these municipalities, only 13% have higher education, while the average is 21%.

In addition, 26 out of the 27 municipalities have a lower than average level of income per capita.

Slot machines are mainly located in socially disadvantages areas. In Oslo, we have compared a typical shopping center in the affluent western suburbs with a corresponding center in the poor eastern suburbs. The customers' expenditures on shopping in the two centers are approximately the same. But the slot machine expenditure is 15 times higher in the easterns suburb.

At the national Australian conference on social policy last year, James Doughney presented an analysis of the socioeconomic consequences of slot machines. To summarize his main findings, he gave his analysis the time "Socioeconomic banditry".

The population studies on gambling seem to give a somewhat more complicated picture. It seems that low income groups tend to gamble more on slot machines, lotteries and instant tickets, and that casino gambling and sports betting seem to be more evenly distributed.

But the most important finding seems to be universal in all population studies: Low income groups spend a considerable larger proportion of their income on gambling. As expressed by the researchers who studied the effects of introducing a national lottery in Great Britain: "Gambling increases the socioeconomic inequalities."

The following data on gambling expenditure in different income groups are from Australia:
Household income in 1000 dollars
Share of income
< 15
> 125
Realizing that the main reason for legalizing gambling is to have a so-called "voluntary taxation" instead of directly increasing taxes, is this social profile what taxation should be like? To have a regressive tax, collecting the largest proportion of disposable income where the loss of each dollar hurts most?

The leading Norwegian statesman in the last century described his taxation ideology in one sentence:

"I think those who have the broadest shoulders should carry the heaviest burden."

This is an ideology for progressive taxes. Gambling is a regressive tax.

Bill Eadington said yesterday that problem and pathological gambling is the main threat facing the gambling industry. I think there are two more threats:

As the regressive nature of gambling revenues will become better known in the years to come, there will be doubts about the ethical appropriateness of financing beneficial causes by omposing a regressive tax, and

As experience accumulates over time, an increasing proportion of the population will have to disccover the fact that legalized gambling is practically never a way of getting rich, but is often a way of getting poor.