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…
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Any time payout is ~$600 Million or more it is a fair bet with positive expectation, i.e. pays better than the odds. Still have a better chance being hit by the Spacestation but a whole lot more fun.
What if Scooby goes out into the orbital path of the spacestation? Will Scooby win the lotto?!
A rhoo-rhoo-rhoo! Scooby doo!
What is mixed in with Scooby's dogfood?
I can feel it Maobamma, I'm going to win The Peoples Lotto!
Sorry, bud, and I do mean bud, you are relegated to the canine division, which pays out in milkbones.
Ground control to Scooby Doo
Ground control to Scooby Doo
Take your protein pills and put your helmet on
Ground Control to Scooby Doo (Ten, Nine, Eight, Seven, Six)
Commencing countdown, engines on (Five, Four, Three)
Check ignition and may God's love be with you (Two, One, Liftoff)
This is Scooby Doo and I'm floating in a most peculiar way
Looking to win my lotto pay.
Scooby Doo to Zero Hedge.
And even if you win but also happen to live in Illinois, expect an IOU until they can gather up the prize money.
.gov should consider a volunteer tax system. oh, that's right. it is.
How much of the "poor" people's money is simply government money in the form of entitlements? As they win the lottery a major portion is taxed back to...the government.
FUCK THE POWERBALL. I want everybody to lose and I like my odds.
Scooby's going to win! Scooby time! Yea!
So why is this daydream any worse then some penny stock or Argentinian bond?
"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."
Really? How hard is it to pay attention in a convenience store. Extra points though for working into the article an oblique reference to your physical fitness routine and your narrow circle of friends. The only thing missing was digression on how often you wash and wax your Prius. What a priggish snob.
Lotteries are a voluntary tax on people who CAN'T DO MATH. Anyone who finished high school math should have taken enough statistics to figure out that the odds of winning the lottery are atrociously bad. Therefore, people who can't do math pay this tax. Unfortunately, this also generally means the poor. I will not comment on whether there is a cause-effect relationship between these two descriptors of the demographic of lottery ticket buyers.
Right, like 'wisely' investing your money with the Corzines of the world will lift you out of poverty....
Did you see the story of the guy who went into the gas station, gave the guy a slip of paper with the number on it (on video) and later won? NYC lawyer contacts lottery (Iowa or Michigan ?) with winner who wants to remain anonymous last day (1 year later) to claim the prize. Winner turned out to be lottery security offical gave them the number and ***somehow*** made it hit. He's in charge of any such fraud investigation. Probably a story on Z-hedge somewhere.
http://www.aol.ca/article/2015/04/15/former-iowa-lotto-employee-accused-...
Nothing even remotely like a tax. A tax is not something we voluntarily pay for, we pay because we have a gun to our heads. Buying a lottery ticket is a voluntarily exchange. I value the chance to win the prize ( and the opportunity to dream about it ) more than I value the money that I pay for the ticket. It doesn't matter what the author of this stupid article thinks of the transaction...he is free to chose not to buy lottery tickets. The same cannot be done with a tax, which is what makes a tax so objectionable.
If it's not a tax, then why have the proceeds go to the public coffers? Get some perspective.
There are more people that buy lottery tickets than pay income taxes.
you should know the answer to that one.
because a mafia racket calling itself the government will eliminate anyone attempting to compete with them.
and it's not really the "public" coffers...the government does not represent the public, it is not by, of, nor for the people, if it ever has been.
So you agree with me that it is a tax, but need to pound your chest like you have some unique insight on the matter.
Soldier on, Jethro.
no, i really don't agree with you about anything.
thanks for playing, though.
So what about fees collected to enter National Parks? Or from a different perspective, the taxes on tires, cigarettes, gasoline and so forth can be voluntarily avoided by not purchasing these items but they're still taxes. So is it the compulsory aspect that makes something a tax? Or can we consider a "tax" ANY funding mechanism employed by the state to fall under the general category of a "tax?" I guess it depends on how precise you want to be...
It IS a tax, on stupidity. And the people who "play" the lottery have no more freedom to NOT play it, than do taxpayers. At least taxpayers get SOMETHING back for their contribution, whether coerced by law or not. The vast majority of lottery "players" get NOTHING of value in return for their "contributions". Just a vague, but indelible confirmation of their lifelong LOSER status.
From 1984:
...They were talking about the Lottery. Winston looked back when he had
gone thirty metres. They were still arguing, with vivid, passionate
faces. The Lottery, with its weekly pay-out of enormous prizes, was the
one public event to which the proles paid serious attention. It was
probable that there were some millions of proles for whom the Lottery
was the principal if not the only reason for remaining alive. It was
their delight, their folly, their anodyne, their intellectual stimulant.
Where the Lottery was concerned, even people who could barely read and
write seemed capable of intricate calculations and staggering feats of
memory. There was a whole tribe of men who made a living simply by
selling systems, forecasts, and lucky amulets. Winston had nothing to do
with the running of the Lottery, which was managed by the Ministry of
Plenty, but he was aware (indeed everyone in the party was aware) that
the prizes were largely imaginary. Only small sums were actually paid
out, the winners of the big prizes being non-existent persons. In the
absence of any real inter-communication between one part of Oceania and
another, this was not difficult to arrange....
Everytime Scooby goes to buy his tickets at the 'store of convenience' Rajpal says 'what do you want Scooby'?
Scooby says 'rhoato twikets'.
Rajpal says 'what"?
Scooby says 'rhoato twikets'.
Rajpal says 'what"?
Then Shaggy saves the day and says 'Scooby wants some lotto Raj man'!
Like Rajpal has good English, I can never understand him!
I can't win because I don't play but if I did win I would buy ZH a few full time admins to weed out the weird fucking spammers.
Taxachusetts #1 (on the list) YEAH!
Risks and taxes passed down yet again...
Like an idiot I totally threw 20 dollars in. Then it dawned on me that I actually wouldn't want to win a billion dollars. Why? Well for starters you would immediately have a frickin nightmare to deal with. You would have to open a blind trust before the throngs of beggers and people who would knock you off for your money show up.
You would have to be scrambling to diversify between hard assets, gold, multiple bank accounts in multiple countries. You would have the obligation as a decent human being to find a way to help others on a massive scale while keeping in mind that you have to teach a man to fish rather than throwing a bandaid on something and pissing money away.
You would become a force to be reckoned with which would be dangerous for any one of us for obvious reasons. You probably would never make an honest friend again and would be forced to become a full time paper pusher whether you wanted to be or not because the more you delegate out the more you will be robbed and you WILL be robbed. You would probably have to shuffle around different hotels for awhile until you could guarantee that the idiots aren't going to release your identity either on purpose or by accident.
Sounds completely exausting. 3-8 million would be much easier.
There is only one solution: fuck everyone else and go Uncle Scrooge.
> You would have the obligation as a decent human being to find a way to help others on a massive scale
Assuming I'm a "decent human being" is your first mistake.
Wall, moat, crocodiles, trespassers will be shot.
Standard Disclaimer: I could of course go full blown "Magic Christian" on a whole lot of people.
It's like gambling. And when I buy one, I get to at least dream. And that dream involves telling all these other bitches to fuck off.
You can't tax that thought. I've already won.
I say play the lottery (powerball). That way if you win you can take down the whole system by buying all the physical silver and expose their ponzi scheme. So ZH'ers can not only hope to win for themselves, they can also hope that their ticket will take down the entire system.
.
The Hunt brothers tried that in 1980. Didn't turn out too well for them.
The odds are printed on the ticket.
Buy a few.
Live like a sheeple for a few days.
Its not so bad
Might just be enough to crash the silver market. Never mind.....JP Morgan has that covered.
Sorry QE49er. Didn't see you post. Great minds.............
Lotteries are no longer winnable - I have to tell you this story - When the Sydney Opera House was being built they ran a lottery to help fund it - Only ONE hundred thousand tickets were sold per lottery for $10 each - First prize was TWO hundred grand - workplace groups formed syndicates because $10 was a lot of money then - the lottery ran until about the late seventies i think . Anyway when i first started working a group of 10 mechanics had won it and got 20 grand each - enough for a substantial deposit on a home and enough for a new car ! Years later I met this old Greek guy (George) who had also won it in the seventies with a syndicate of 3 - They got $66666 each ! George bought a house in Sydney's North for 20 grand ! The average price there today is 1.5 to 2 million - George could have bought 3 houses and a new GT Ford with his lottery win and it was WINNABLE ! How things have changed !
Foootnote - Because lotteries were not computerised in the early seventies these 'syndicates' which contributed weekly,would end up with 2 or 3 tickets in the SAME draw - Increasing you chances further !
I'm no math genius but 1 in 175 million chance to win 1.4 billion with a 2 dollar bet isn't horrendous. Yes, you have the problem of incredibly infrequent events but when the lottery gets so high it's is cheap entertainment as long as you don't take too seriously.
The odds of winning the jackpot are 1 in 292 million, correct?
A ticket to play costs $2, correct?
If the post is $584 million, it is a neutral investment proposition, correct?
False, cuz the winnings are taxable. Lets assume a $900 million win generates $584 million net - it is then a neutral investment proposition if the jackpot is $900 million, correct?
False, cuz they state the jackpot not in lump-sum terms but in aggregate paid-over-time, right?
Eh, fuck it - CNN did the analysis for me: http://money.cnn.com/2016/01/11/news/powerball-jackpot-win-guarantee/
The govt can have half when you get to those kinds of numbers. You are still hundreds of millions ahead of where you were prior to buying your ticket, Bro.
Life doesn't really change that much after the first hundred million.
But what if ten people pick the same numbers and they all win? It's not like that hasn't happened before, and it dilutes the jackpot substantially.
"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."
Your analysis is wrong. The average person does not get 53 cents on the dollar back. They get 0 back. the 0.00001% might get 53 cents on the dollar back.
Right, the estimated ROI is 53, not the actual ROI.
I know the Fed and the TBTF banks try to pretend "risk" and "variance" don't exist....but they do.
You gotta swing at the ball to hit it. You don't play, you got no chance.
do you moonlight as a realtor or used car salesman?
Just like voting right?
Yabba Dabba Lottery Doo!
These must be the same folks who prefer a 10 ounce chocolate bar to a 10 ounce silver bar.