Why The Mega Millions Jackpot Is Nothing But Another Tax On America's Poor

Tyler Durden's picture

Now that the Mega Millions Jackpot has just hit a record $640 million, 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 $640 million one can even afford a few shares of Apple stock. Naturally, we wish the lucky winner all the (non-diluted) best. There is, however, a small problem here when one steps back from the Sino Forest trees. As ConvergEx' Nicholas Colas explains, "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 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 last year.  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, 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).
Note from Nick: Daydreams may be the best example of a product in an inflationary spiral; the price of a Powerball lottery ticket went from $1 to $2 on January 1st.  That news got me thinking about the price elasticity of fantasies.  After all, the state lottery commissions involved in this venture must believe that a 100% price bump will not deter enough customers to lower their overall take.  That’s a big gamble (pun intended) to take on what is an increasingly important revenue input for many state budgets.  Beth takes up the story from here…
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: essentialIn 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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LuKOsro's picture

If an anti-hero for Robin Hood were created it would have been called Mr. Lottery man. 

Bunga Bunga's picture

And based on another U.S. averages, you're about 1,000 times more likely to kill your own child than to win the lottery.



RafterManFMJ's picture

If "the poor" were not subsidized so much, they wouldn't be able to piss money away on cig and lotteries.

TeMpTeK's picture

Ill bet Jon Corzine miraculously wins the next 4 megas in a row... Poof!.. 


TheGardener's picture

Even long before I started to read Nietzsche , I got down hard and plain on lotteries : A desire on something for nothing, ergo criminal intend. Bank robbery versus playing in the lottery ? Cowardice for the latter , guilty on both charges, just too lazy to rob a bank.

Buck Johnson's picture

I bought my tickets and are also in a pool for more at work.  I tell you if I win the big jackpot I would givemy immediate family members 20 million a piece.  Then I would retire and go buy a home on the shores of a ocean in Florida or one of the Carolina's.  I would by the cars and make my live comfortable.  Then I would donate to a local food pantry because thats a good thing to do.  I would wake up anytime I want workout when I wakeup eat good food and have no care in the world.

Then as a challenge and a goal, I would bang every pornstar/playboy model/model/ABCD actress who escorts UTR (under the radar) or above just to say I was with her and have a picture with he.  It would be my weekend fund almost weekly.

SheepDog-One's picture

Of course the lottery is just a scam and a tax on the poor...1 winner and millions pay in, and the payout is even taxed out the ass. I wish I could run a lottery, collect $100 million in a week, pay out 1/10th of that...great gig if youre a govt criminal and can run it.

aerojet's picture

Is there just one winner?  I would expect there would be multiple winners on the next drawing given the number of tickets sold.

Burnbright's picture

Regardless if their are multiple winners their is only one pay out.

El Viejo's picture

It also skews local economies.

Chicago did a study and found that after 5 years the people lose interest in lottery and then the lottery org has to increase the advertising budget to keep interest up, which reduces payout for education etc.


mayhem_korner's picture

which reduces payout for education etc.


Can we call it what it is - a transfer payment from (mostly) those that can't afford it to lottery commission beaurocrats and school administrators (and by extension, the teachers' union bosses)?

Jason T's picture

OT but worth paying attention too as US$ days are numbered.. http://www.youtube.com/watch?feature=player_embedded&v=2vg9qvYwQHg

BeerBrewer09's picture

Why would anyone junk this? It's clear that other nations don't want to buy and sell things in a debauched currency.

DeltaCharlie's picture

Yes, a tax on the poor, Tyler, but also the STUPID!  160mil to one?!! 

Iam_Silverman's picture

"Yes, a tax on the poor, Tyler, but also the STUPID!"

Here, let me fix that for ya':

A tax on the STUPID.  There.  Anyone can waste their money on a system guaranteed to NOT pay out more than it takes in.

I have seen this lame diatribe before.  Folks, anything the lower wage earners spend money on will be at a higher percentage to their income.  Duh..

How about, "Low Wage Earners Spend Higher Percentage Of Income On Smokes and Booze" for a grabber headline too?  Kinda makes it sound like those higher in the wage brackets don't imbibe or smoke.

boiltherich's picture

I really had to snort a few times when I saw this tax on the poor/stupid bullshit, I might blow a fiver on the lottery which gives me in return a great many hours of dreaming about financial security, and some here say that a tax on the stupid, in the meanwhile how much did they donate to a church or the GOP?  And they call ME stupid?  And I do not pray to their god for a win for the same reason I don't go camping with Paul Bunyan. 

Xkwisetly Paneful's picture


Paypaling RP was +EV just ask around.

bob_dabolina's picture

Now that the Mega Millions Jackpot has just hit a record $640 million, people, mostly those in the lower and middle classes, are coming out in droves

Uh no. EVERYONE is playing this lottery. TMZ ran a story about some celebrity that dropped over $700 on lotto tickets (over the last drawing)

Your odds are probably worse than getting hit by lightening while holding a can of shit, but you have to buy at least one ticket, I don't care who you are.

bob_dabolina's picture

If no one wins it this time I bet the next time it would hit a bil.

That would be nuts.

SilverIsKing's picture

Odds surely favor a winner this time around but I assume there are probably a few combinations that won't get played.

My guess is that we'll see multiple winners of the jackpot so that $640M won't look so good when it's split up into a number of pieces...lol

BeerBrewer09's picture

I'm only handing over my $5 to get a chance to trade all those FRNs for 250+ tons of silver. Send J.P. to the Morgue.

boiltherich's picture

SIK, odds do favor a winner this time, but they did last time also.  The few combinations that don't get played at all have exactly the same odds as those that do.  Any six numbers can lose. 

Still, anything that gets the mentally sedentary to think about such things as statistics has to have some redeeming value.  I know I have thought a lot about the nature of statistics and just plain old mysteries of the universe in regard to the lottery.  For example, what is it in the human mind that tells them 7-19-33-36-44 and a mega of 15 somehow have a better chance of coming up as winning numbers than 1-2-3-4-5 with mega of 6?  Statistically they have the same odds.  As for sharing the win with others, I could look at that as a disappointment if I wanted to should it happen to me, or I could decide to be thankful for my luck AND theirs. 

Still, the dreams I have built around a possible win require at my current age a cash value after taxes of $30 mil minimum, so I will not play until it reaches a value that will leave me that much if I won.  I only play a little then and the money I save by not playing when the pot is small is money I can blow without mental discord when it gets really huge. 

The good thing about it all is that it is not a tax, by definition a tax is compulsory, this is no more a tax than deciding to head over to Tinsletown and lay out $20 for a movie and popcorn with a soda, except a movie does not give me half the fun for days that the lottery does. 

And if people really wanted to point out how slim your odds are then I in turn want to point out that they have already "won" against other MUCH higher odds just being here, had that deformed slower sperm not ended up going south on their mamas legs just think where they would be.  :)  That alone was one in about 250,000,000.

SilverIsKing's picture

I think some of that slower sperm made it.  How else do you explain Tim Geithner?

Vagabond's picture

I'm not buying shit.  Lottery tickets are for people who like to gamble with losing odds.  Stop paying attention to the circus.

lemonobrien's picture

you gonna buy stocks instead?

Vagabond's picture

land, metals, and for my entertainment I buy weed and booze.  Fuck the lottery.

boiltherich's picture

Why buy a $1 lottery ticket when you can buy a lemon to suck for $0.79?

sooner_gold's picture

Another Tax?  49% of Americans pay no income tax yet get money back on tax day.  The poor do not pay taxes in America.  At least this is one way of getting them to have some skin in the game.

kridkrid's picture

Such bullshit.  You likely aren't smart enough to understand the stupidity of what you've written.  Keep repeating it... it's your role in the divide and conquer bullshit pulled by the bankers.

Xkwisetly Paneful's picture

Yea such incredible bullshit!

You aren't likely smart enough to understand the stupidity of what you've written.

Oh you're in the top .000000001% of historical mankind and those a whopping .0000000005% higher are the greedy ones?

Keep repeating it.....it's your role regardless of existing like royalty of not more than two generations ago to perpetually play the woe is me victim.


SeverinSlade's picture

So the poor don't pay inflation tax? 

LawsofPhysics's picture

apparently, or tax on anything they buy. I need to start shopping at this "poor only"store.  Just bought some more tools.  The tax on these durable goods was almost 10% or over $500.  Bull fucking shit.

SheepleLOVEcheddarbaybiscuits's picture

but why is there inflation? from the increase in social spending, which comes from tax payers(ie people who pay more in taxes than the value of the public goods they consume) and tax consumers(people who consume more public goods than taxes paid). Very simple.....

kridkrid's picture

WRONG.  There is inflation because of the monetary system.  There is inflation because money is credit that is loaned into existence with interest that begins to accumulate at creation.  The SYSTEM requires more debt to be created or it crashes.  Government debt is only one piece of debt ponzi scheme. 

Very simple describes your mind if you buy the lie that you have been provided and have chosen to repeat.  They sold you the lie so you would have someone to blame other than them.  The easy scapegoat for you... the poor.  Very simple... your mind.

Maos Dog's picture

EXACTLY! Not a PENNY of that printed money goes into SNAP, EBT, TANF, TARP, Welfare for the Poor, Welfare for the rich, ect, ect....

Xkwisetly Paneful's picture



There is also inflation with the government being the largest consumer, employer, renter, landlord, borrower and lender in the country.

It is fake demand which drives up the price of everything whether the federal reserve exists or not.

Very simple... your mind.

Saro's picture

The devaluation of money hurts people who have cash on hand and helps people who are in debt.  Of course, the rich are more likely to have assets on hand too.

Without some evidence one way or the other, the most I'd be willing to wager is that the guy with his fingers on CTRL-P is the one likely to be winning the game.


SheepDog-One's picture

Lets see how the other casino is doing, the DOW....oh +50 right where its been since open. Suspension of disbelief 100% in effect while the whole building burns to the ground.

Flakmeister's picture

Selling hope.... the system keels over without the illusion of hope...

Clayton Bigsby's picture

I reject your reality, and substitute my own!

I, and my other hundred million idiots that bought into said scam, look forward to telling you all to swing from my nuts after I win tonight...

lemonobrien's picture

hey, i bought a ticket, and i ain'ts poor.

Bob's picture

The lottery is an extremely regressive tax.  I think of it as a hopelessness tax. 

Iam_Silverman's picture

"I think of it as a hopelessness tax. "

And yet....... it is still a voluntary one.  Why not just think of it as an unsolicited act of charity to someone who may someday have some magic numbers in their hand?

Goldilocks's picture

1 in 160 million... is that charity?

j.tennquist's picture

I remember when the lottery was sold to the voters of my state with the claim that ALL the procedes would go to fund education and schools.  

That was back when they had one card and they called out the winning numbers on TV every Wednesday night.

Now they create a new "scratch-and-sniff" card every week, or so it seems.

And every year I read how the schools are consistently under funded.

Another scam, courtesy of the our friends in politics. 

kridkrid's picture

such a scam... of course money is fungible... so it matters not if 100% of the proceeds go to education... it just means that other buckets of taxation no longer get funneled towards indoctrination.. errrr... I mean education.  Life is a racket.  All of it.

Dave Thomas's picture

"I have never bought a lottery ticket and honestly don’t even know how."

Has the author not set foot in a convienece store in the last 30 years? The lotto apparatus and advertizing in most stores is practically shouting at the customer.