Why The Powerball Jackpot Is Nothing But Another Tax On America's Poor
Now that the Powerball Jackpot has just hit a record $1.4 billion, people, mostly those in the lower and middle classes, are coming out in droves and buying lottery tickets with hopes of striking it rich.
After all, with $1.4 billion one can even afford enough shares of Apple stock to become a bigger holder than the Swiss National Bank (alterantively, one can buy a whole lot of VXX).
Naturally, we wish the lucky winner all the (non-diluted) best. There is, however, a small problem here when one steps back from the trees. As ConvergEx' Nicholas Colas previously explained, "Lotteries essentially target and encourage lower-income individuals into a cycle that directly prevents them from improving their financial status and leverages their desire to escape poverty. Yes, that’s a bit harsh, and yes, people have the right to make their own decisions. Even bad ones… Also, many people tend to significantly overestimate the odds of winning because we tend to assess the likelihood of an event occurring based on how frequently we hear about it happening. The technical name for this is the Availability Heuristic, which means the more we hear about big winners in the press, the less uncommon a big payday begins to seem." Call it that, or call it what one wishes, the end result is that the lottery is nothing but society's perfectly efficient way of, to use a term from the vernacular, keeping the poor man down while dangling hopes and dreams of escaping into the world of the loathsome and oh so very detested "1% ers". Alas, the probability of the latter happening to "you" is virtually non-existant.
Full explanation from Convergex' Nick Colas on how and why Americans are lining up in lines around the block to... pay more taxes.
What Seems To Be Is Always Better than Nothing
Summary: American adults spent an average of $251 on lottery tickets. With a return of 53 cents on the dollar, this means the average person threw away $118 on unsuccessful lotto tickets – not a great investment. So why are we spending so much? Well, lotteries are a fun, cheap opportunity to daydream about the possibility of becoming an overnight millionaire (or in this case billionaire), but on the flip side people tend to overestimate the odds of winning. Lower-income demographics spend a much greater portion of their annual earnings on lottery tickets than do wealthier ones.
Since lotteries are state-run, that effectively means that the less affluent pay more in taxes (albeit by choice) than broadly appreciated. And even winning the lottery doesn’t guarantee financial success. More than 5% of lottery winners declare bankruptcy within 5 years of taking home the jackpot. Despite their drawbacks, though, lotteries are no doubt here for the long haul – in states that have lotteries, an average of 11% of their total revenues come from lottery ticket sales, and the number is even as high as 36% in 2 states (West Virginia and Michigan).
Consider the following credit-card-advertisement style sequence of statistics:
- Lottery ticket sales in the US in 2010: $59 billion
- Average spending per person: $191
- Average spending per adult: $251
- Chance at hitting the jackpot: (Apparently) priceless.
I have never bought a lottery ticket and honestly don’t even know how. And as far as I’m aware, I don’t know anyone who spends north of 200 bucks a year playing the lotto. The only lottery my friends play is the NYC marathon lottery, where they’re gambling for maybe a 1 in 13 chance to fork over $255 for the privilege of slugging out 26 miles through the city’s streets. Not quite hitting the jackpot in most people’s minds.
But someone, somewhere is buying all those tickets. In Massachusetts, where the lottery is more popular than in any other state, people spend an average of $634 a year on Mega Millions, Powerball and the like. Delaware comes in at number 2 with $504 spent per person, while Rhode Island ($469), West Virginia ($388) and New York ($357) round out the top 5. North Dakota brings up the rear with per capita lottery spending of $34. You can see the full list in the table following the text.
It’s difficult to pinpoint exactly who is investing so much money in a product that provides poor returns, but numerous studies show that lower-income people spend a much greater proportion of their earnings on lotteries than do wealthier people. One figure suggests that households making less than $13,000 a year spend a full 9 percent of their income on lotteries. This of course makes no sense – poor people should be the least willing to waste their hard-earned cash on games with such terrible odds of winning. (http://www.dailyfinance.com/2010/05/31/poor-people-spend-9-of-income-on-...).
Why bother? Well, one answer is obvious enough and applies to just about everyone who plays. For a buck (now $2 for Powerball) we have a cheap opportunity to daydream what could happen if we suddenly won millions of dollars. But lotteries return 53 cents to the dollar. So why are poor people irrationally buying tickets when the probability of winning is so slim? One study by a team of Carnegie Mellon University behavioral economists (Haisley, Mostafa and Loewenstein) suggests it isn’t being poor but rather feeling poor that compels people to purchase lotto tickets.
By influencing participants’ perceptions of their relative wealth, the researchers found that people who felt poor bought almost two times as many lottery tickets as those who were made to feel more affluent. Here’s how they did it:
- Participants were asked to complete a survey that included an item on annual income. One group was asked to provide its income on a scale that began at “less than $100,000” and went up from there in increments of $100,000. It was designed so that most respondents would be in the lowest category and therefore feel poor.
- The other group, made to feel subjectively wealthier, was asked to report income on a scale that began with “less than $10,000” and increased in $10,000 increments. Therefore most participants were in a middle or upper tier.
- All participants were paid $5 for participating in the survey and given the chance to buy up to 5 $1 scratch-off lottery tickets. The group who felt wealthier bought 0.67 tickets on average, compared with 1.27 tickets for the group who felt poor.
Lotteries essentially target and encourage lower-income individuals into a cycle that directly prevents them from improving their financial status and leverages their desire to escape poverty. Yes, that’s a bit harsh, and yes, people have the right to make their own decisions. Even bad ones… Also, many people tend to significantly overestimate the odds of winning because we tend to assess the likelihood of an event occurring based on how frequently we hear about it happening. The technical name for this is the Availability Heuristic, which means the more we hear about big winners in the press, the less uncommon a big payday begins to seem.
Not that hitting the jackpot is guaranteed to substantially improve the winner’s life. Economists at the University of Kentucky, University of Pittsburgh and Vanderbilt University collected data from 35,000 lottery winners of up to $150,000 in Florida’s Fantasy 5 lottery from 1993 to 2002. Their findings are as follows:
- More than 1,900 winners declared bankruptcy within 5 years, implying that 1% of Florida lottery players (both winners and losers) go bankrupt in any given year, which is about twice the rate for the broader population.
- “Big” lottery winners, those awarded between $50,000 and $150,000 were half as likely as smaller winners to go bankrupt within 2 years of their win, however equally likely to go bankrupt 3 to 5 years after.
- 5.5% of lottery winners declared bankruptcy within 5 years of bringing home the jackpot.
- The average award for the big winners was $65,000 – more than enough to pay off the $49,000 in unsecured debt of the most financially distressed winners.
Lottery players tend to have below-average incomes, so they are probably less accustomed to budgeting when they receive a windfall. There’s also a psychological term called Mental Accounting that explains how people might treat their winnings less cautiously than money they’ve worked for. Money has come into their possession through luck, which similar to bonus payments, often induces an urge to purchase unnecessary items.
But whether you think state lotteries are awful or great, there’s another word for them: essential. In both West Virginia and Michigan, for example, lottery sales accounted for 36% of total state revenues in fiscal year 2010, and on average state with lotteries take in 11% of total revenues in the form of lotto ticket sales. We’ve included the full list in a table following the text. There are still 7 states that don’t have their own lottery systems, so the national average would be lower.
A couple of closing thoughts on what this all means:
- Don’t make investment decisions when you are feeling poor. The study we cited earlier clearly shows that you are likely to buy more “lottery tickets” (think of that as a metaphor for any long shot investment) when you feel less affluent than those around you.
- Lower income individuals likely pay more in “Taxes” than most economic commentators realize. Assuming that the 80/20 rule applies to lottery participation, the bulk of that $59 billion in annual receipts likely comes from 20-25 million less affluent households. That would be about $47 billion from this demographic, or roughly $2,400 per household. Yes, I get the notion that this money is handed over in the hope of a payoff. An ill-advised and mathematically unlikely hope, as it turns out. But does that mean it doesn’t count as a societal contribution?
- Maybe the U.S. needs a national lottery. Yes, these games don’t necessarily encourage the best financial planning among the less affluent. But there is no denying that playing the lottery is entirely voluntary. There are probably some anti-gaming factions in government who wouldn’t like this approach, to be sure. But there’s also no doubt that the Federal budget could use the money. And, hey, you never know…
(9 votes)
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Absolutely YWCB. We need more volunteer taxes. I have this convenience store kind of in a ghetto area on the way home. I stop sometime for milk etc in a pinch. Place is like a goddamn casino. 50 scratch tickets and plastic seats for keno. The dregs sit all day smoking cigarettes and gambling the day away. The owner feels bad when I'm in line 10 deep and the only one not gambling. He calls me aside and apologies. I just smile and tell him not to worry. In fact it pleases me to see so many volunteering back their gov't paychecks. One less dollar the rest of us pay.
I love ZH but it seems to be getting a little whiny and sometimes arguing both sides. So now they want more laws to protect us from ourselves? Big failure on this article. Total pandering to topic du jour. but I can give them a pass. Bring on the real articles!
And should people also be free to voluntarily prey on the stupid, so all lies/ponzi schemes/frauds are welcome too?
I remember my psych lecture on the subject of odds: "Imagine if instead of watching the winners, you had to winess a TV ad showcasing each of the losers". Even if every person was only screen for mere 3 seconds saying "I didn't win anything", you'd have to sit in front of the TV for over 10 years. Then I'd come back and ask you if you still wanted to buy a ticket.
lol ... that snap shot is priceless.
Mega-Jackpot wins for everyone....!!!!!! -Bernie Sanders-
!
"If we COLLECTIVELY jack off the dog to feed the cats, WE CAN'T LOSE!
It's all "legal" and licensed by .gov.
Gimme all yo mutha fuckin money...bitchez! ;-)
better to be sanctioned and legal by .gov than the "criminal elemants"
lol...I get your sarc, yes, they learned everything they know from the "criminal elements".
From Charles Ponzi to Ben Bernanke.
I miss the days when smoking in a bar was legal, while gambling and sex were 'in the back, talk to Nick' sorta thing.
I purposely walked through a Publix the other day with a half smoked Romeo y Juliet hanging out of my mouth...about 65% of the people looked at me like I was a criminal...5% actually were stupid enough to say something about an unlit cigar in their presence and 30% just smiled & nodded.
It doesn't take much to stem the tide, just be different and have a good time while doing it...lol.
////
And yeah, I knew the guy above was being serious.
But so was I ;-)
Smoking in bars is legal in Florida. Depending on the joint you can find sex there.
Yep, I live in Indiana because I refuse to register my guns with the corrupt as hell Peoples Republic of Illinois. You can smoke in most of the bars still.
Indiana is unique. It is the only state I know of that made it explicitly legal to kill a police officer in a justified defense scenario.
Come to AZ we have nice patios everywhere where you can smoke and some of these patios are bars within themselves. All of the fun happens on such patios and then you don't have to worry about reeking. People smoke pot and cigars outside too and nobody cares. Even many in snotty Scottsdale have nice smoking patios.
I am not a gambler but I have been to a couple casinos here for fun and they were some of the nicest and cleanest casinos I ever seen and you can smoke your ass off at any of their multiple bars or anywhere else. We need as many of you as possible to offset the Californians.
Plus we have a midget bar with a stripper pole. Midget bartenders will occasionally get on the pole. Beat that shit!
Tell this to the Staten Island dude that just won $165 million (closer to $50 million after discounting and taxes.)
Powerful argument, and it reminds that I once knew someone who smoked three packs a day and never got cancer.
Where's Alabama? ...oh they aren't a state
They may not have a lottery.
Edit: They do. Bad list. Or maybe they don't report/gather this data? Sure does not make sense.
Taxes for uncle SAM and complexly rigged, once in a while they let somebody off the street win..
Scooby!
Suckers. They would be much better off (statisticly speaking) playing baccarat, or betting on the pass line and/or the point at a decent craps table.
Yeah, maybe, but you have to dress to play baccarat. OTOH, I dont need a black tie at MY 7-11 if I show up before 6.
Actually, the same people are in the casino's, too. It's a whole bad lifestyle.
ON the positive side, it is just entertainment money. No rational person thinks of it as investing. It is the same category as a movie, eating out or an impulse snack..
Which hedge fund(s) will use OPM to puchase a couple hundred million tickets, with every possible combination of numbers, to offset their losing investment portfolios?
Assuming only one or two hedge funds (or billionaires) do that, not a bad bet unless a couple more lucky winners spend $20 at the quik-e-mart and also get the winning numbers.
What has 95 balls and fucks poor people?
48 bureaucrats (one of which has only one testicle)
They changed it from 175 million I one to 292 million to one on the big prize but made it easier to win $4.
Idiots, there may not be a winner for a while. Then they will have to fix it again. Media won't report in that, just the dream that someone will win.
In Illinois, they dream of getting paid...even when they do wn.
http://www.chicagotribune.com/news/ct-lottery-lawsuit-tro-met-20151111-s...
That was priceless! Heads they win, tails you lose.
Scooby will purchase 1000 tickets this time. On the credit card.
I'm going to WIN!
i understand trying to win $1M+. What I don't understand are the $1 scratchers and Pick 3. The most you could ever win on those games is $500. It wouldn't take long to save $500 just by not playing.
And it seems everytime I fill up my scotch reserves I get stuck in line behind these jack offs for 10 minutes while they check all their pitiful tickets. Bring in 20 scratchies leave with 2. Sounds like a winning strategy.
I went to the store to buy one Powerball ticket Saturday. The guy in front of me purchased a 12 pack of Miller Lite and $20 worth of various lotto tickets. All I could think of was for that kind of money he could have bought a bottle of cask strength Knob Creek. One sip of that would get a better buzz than the whole 12 pack of that swill.
Mmmmmmm...the brownest of the brown liquors.
Aaaaand now it's time to pour a drink.
Or you can purchase a $5 latte at Starbucks and pee it out within the hour. I think I like the potential prizes in Powerball better.
At least I get a chemical buzz from the coffee
And when you dont win you can eat the ticket. mmmm, fiber.
You can stop eating and drinking completely and save a considerable sum over the next several days and pass that on to your heirs.
Freedom means the freedom to enter into contracts and make bad decisions. The question is should government be offering such a bad choice to the people it claims to serve, especially when it stands to profit so much?
Gambling is bad, either illegal or controlled until the State saw the money. Now, it is all roses and sunshine, literally, for the parks and for the kids. I have never seen the calculations but it is a huge net windfall, too...far better than what casino's are allowed to take in.
Consider the numbers: The State only pays out about half, maybe 60% in prizes. So, out of a billion in receipts, maybe 600mil goes out, at best. Now, the big prizes get taxed back again to the States and the Feds.
If you won say $500 Mil. Roughly $200 mil goes to the Feds and another 5-10% back to your state, more in NY with city and county taxes. If you take your $250m and start distributing to relatives, say half, it is again taxable at Fed and state rates.
They, the State as a single entity ends up with aou70-80% of the money. This far better than even a mafia gambling operation. Oh, when it was illegal they called it "running the numbers" and is where the term "bag lady" comes from as they used to carry the bags of cash. Back then you could get time in Sing Sing. Now, it is patriotic!
Rather than buying what they can afford they should tell them to buy just one because you still get the dream and aren't going to win no matter how many you buy so don't throw away more $$ than you have to.
Comments like this are rather negative.
Perhaps when the time comes for the helicopter drops it should take the form of a 'reverse-lottery' in which the winnings go randomly to We The People.
The PowerDrop.
Hey... don't be talking shit about my retirement plan. Gonna win this time... can feel it in my bones... my ship has arrived bitches.
Weird - I'm experiencing the same sensation.
usually gas. Thankfully I have a dog to blame.
Betcha got a maxed out 401(k) too, eh?