Lotto – A Tax on Stupidity?


A popular form of gambling, lotto combines elements of both chance and skill. To play, a player chooses a series of numbers from a range; the more numbers that match the winning ones, the bigger the prize. The odds of winning vary widely, but in general are low. If the entertainment value of winning is high enough for a given individual, the disutility of purchasing a ticket may outweigh its price tag.

Lotto, however, has a distinctly different character than other forms of gambling. Its rise coincided with a decline in Americans’ financial security, as jobs and pensions disappeared, health-care costs climbed, and the American dream began to look like a pipedream for more people than ever before. In this context, the allure of big jackpots fueled a newfound belief that wealth could be won by buying a lottery ticket.

It is no surprise that states became increasingly adept at marketing the lottery. As the nineteen-sixties wore on, state budgets were straining under a growing population and rising inflation. Balancing a state’s books without raising taxes or cutting services was difficult, and since both options were highly unpopular with voters, many states turned to the lottery for help.

Advocates of lotto argued that since gamblers were going to spend their money anyway, the government might as well take some of it. They also argued that, since a lottery’s profits were untaxed, it would be a painless way to raise revenue. This line of reasoning had its limits, but it provided moral cover for those who approved of lotto.

The result was that lottery playing surged, and it continues to do so today. In 2021, Americans spent upward of $100 billion on tickets, making the lottery by far the most popular form of gambling in the United States.

Most of the people who buy tickets are poor, and the vast majority of them are Black or Hispanic. Lottery products are heavily promoted in these communities, which have a smaller discretionary income than the rest of America’s population. The result is that the bottom quintile of income spends a larger percentage of its disposable income on tickets than do other income groups.

While lottery advocates often characterize the game as a “tax on stupidity,” it is a more accurate description to say that it is a tax on those who have the least opportunity to win. The regressive nature of lottery spending is especially acute among the very poor, whose chances of winning are even lower than those of the middle class.

Most lottery players don’t understand how unlikely it is that they will win, and they are deceived by the way the winnings are paid out. When winnings are awarded in a lump sum, the winner can expect to pocket only about 1/3 of the advertised jackpot, after accounting for federal and state withholding taxes. When winners receive their winnings in an annuity, they typically expect to pocket about the same amount.

Comments are closed.