Everyone loses in the National Lottery

Lottery balls
Image source: Jeremy Brooks on Flickr

“Anyone can be a winner!” proclaim the billboards advertising the Israeli National Lottery, but in this game of chance, distributive justice is the clear loser. What at first seems like a voluntary, fun and harmless way to raise money for the public good is in fact a colossal tax-levying mechanism, under-regulated and regressive, not only in Israel but around the world.

The Israeli National Lottery (‘Lotto’) was founded in 1951. At the time, Israel was grappling with housing, feeding and employing hordes of immigrants from post-war Europe, the Middle East and North Africa, while in the midst of ongoing war with its neighbours. There was no money for a hospital in Tel Aviv, and Israel Rokach, Tel Aviv’s mayor, wanted to build one. He decided to hold a sweepstake. The initiative was so successful that within a few months every other mayor in the country wanted in as well, and thus the national lottery was founded.

The Lotto was established as a not-for-profit private company; its board of directors made up entirely of municipal and governmental officials. All the proceeds from the raffles were spent on public causes, such as health, education and welfare. Today, the Lotto raises five billion ILS annually (About 8.3 billion GBP), and over twenty billion ILS have already been invested towards public goods over the years.
But the reality of the Lotto is complicated. Gambling is a criminal offense in Israel, and gambling contracts are unenforceable in court. The Lotto enjoys a unique exemption from the prohibition, and operates as a de-facto, state-sanctioned monopoly. Thus, the Lotto encourages gambling, whilst benefitting from no competition. It is in fact a tax, one that is regressive and hypocritical.

But, one might ask, how is buying lottery tickets a tax, when it is a matter of choice? Intuitively, we associate taxes with obligation. Since no one is obligated to buy lottery tickets, it seems to follow that this is not a tax at all. But taxes are actually not all that mandatory. For example, many states charge mandatory fees for passports and driver’s licenses. A citizen may, of course, choose not to purchase them and avoid fees. Based on this logic, it is also possible to claim that one is not obligated to work and thus may opt out of paying income tax.

The above argument, which can be summed up as: “Don’t earn and thus don’t pay taxes” is widely rejected, since it undermines a person’s right to exercise innate capabilities and potential. Likewise, pretending that fees on passports and licenses are not a tax ignores a person’s right to freedom of movement. But is there a right or a freedom to gamble?

The answer will vary in every society, but in Israel, as in India, China, France and many other countries which operate state-run lotteries as monopolies, the state recognises gambling as a public necessity so important, that it overrides an otherwise absolute prohibition on gambling. Similarly, the UK, Italy and Sweden, to name a few, impose less severe regulatory restrictions. In short, most states give de facto legal protection to gambling, even as they claim to try and limit its scope.

There are many reasons for the almost world-wide restriction, if not prohibition, of gambling. One is the idea that gambling is irrational, and that citizens ought to be protected from themselves in choosing to engage in it. Another, disapproval of an activity that creates artificial risk, and a moral, some would say, puritan outlook about work ethic and productivity. Religious justifications also abound, especially in Muslim countries. However, the dominant motivation tends to be rooted in public policy, specifically, the addictive potential of gambling, and the damage gambling addicts cause to themselves, their families and society as a whole. But these justifications beg the question: if gambling is indeed so terrible, why not prohibit it entirely? The reality is that the states with the most severe restrictions on gambling tend to be the ones operating national monopolies. But if a state prohibits gambling, it should be the first to reject state-sponsored lotteries.

The answer is obvious. The economic utility states gain from the prohibitive-monopoly arrangement is a powerful motivation. Indeed, studies have shown an established correlation between economic hardship and establishment of state lotteries, as exemplified by the Israeli case. Moreover, politicians regard lotteries as politically “cheap” taxes, since they are voluntary and entertaining. This is especially true for societies with an engrained distrust of government and taxes.

There is no doubt that the special attributes of the gambling market require state regulation, but clearer separation between regulators and gambling operators will only make that regulation more effective. Fittingly, in 2006 the European Commission proclaimed that as long as France encourages citizens to take part in state-sponsored gambling, it cannot invoke public policy justifications to defend its prohibition on private gambling.
Even if one were to overlook the basic hypocrisy of the state operated lottery, one cannot overlook its regressive nature. A “good tax”, according to the economist Adam Smith, is equal and just. This basic requirement demands every taxpayer contribute their proportional amount, and that the tax be used to redistribute wealth. In the gambling tax, a disproportional amount of income is collected from the lowest socio-economic classes, making it regressive: a “bad tax”.

What’s more, since the lottery proceeds fund socially desirable ends like community centres and hospitals, the lower classes are in essence paying for goods that should be funded by the entire population via more progressive taxes. And what’s worse, many studies have shown that taxes are transferrable: the lottery proceeds do not add to, but eventually replace funds that would have otherwise been allocated from the general tax revenue. The flaws outlined above are underscored by the incompetence of the lottery as a tax collector. In Israel, about half of the lottery proceeds (2-3 billion ILS) are spent on prizes annually. Of the remaining, about a billion ILS is spent on administrative costs and advertising, whilst another billion is actually invested in public goods. Thus, the cost of collecting the money amounts to 100%; astronomical compared to the administrative costs of the general tax authority (less than 1%).

There are many arguments in favour of operating a national lottery: there are mitigating effects associated with monopolies; it can be seen as a way for the state to control the gambling urges of its citizens; and one may even suggest Machiavellian incentives, put simply – to give the people what they want. But these goals may be achieved through a licensing regime. There is no need for a monopoly that restricts freedom of occupation and creates an insidious and politically intransparent tax. The state operated lottery is an often hypocritical, always regressive tax, and is well overdue for serious public debate, if not outright removal. As everyone knows, no one ever really wins the lottery anyway.

Netta Geist is is an MPP student at the Blavatnik School of Government.

The article is based on a paper which was written under the supervision of Professor David Gliksberg of the Hebrew University, as part of the seminar on “Tax Reform”. Netta would like to express her thanks to Professor Gliksberg for his significant guidance and assistance in developing the main argument outlined above.

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