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No Matter Who Takes Home a Record Lottery Prize, the Government Always Wins

The Mega Millions jackpot has reached an astounding $1.6 billion. You and I probably won't win, but the government definitely will.

Richard B. Levine/NewscomRichard B. Levine/NewscomAt some point in the near future, the record-high Mega Millions jackpot is going to make someone very, very rich. But as is usually the case when it comes to the lottery, the biggest winner will be the government.

First, a disclaimer: Later today, I fully intend to stop by a convenience store and spend $2 on a Mega Millions ticket. The allure of $1.6 billion is too much, even if my odds of winning the top prize are just 1 in 302,575,350. I might even buy a Powerball ticket too, because $620 million doesn't sound like a bad payout either.

But before you run out and emulate me, there are a few things us suckers need to keep in mind about the lotto.

First, the majority of lottery revenue goes back to the government. In 2015, The Atlantic estimated that 40 percent of all lottery ticket sales are allocated to state governments. As Steven Greenhut, western region director for the R Street Institute, explained in a 2016 piece for Reason, this "voluntary tax" to support education is supposed to be a positive. But politicians often use lottery revenues to supplant school budgets. As Greenhut put it: "Money is fungible, so the education element mainly is a public-relations ploy to help people feel good about the dollars they spend on tickets."

Direct ticket sales aren't the only way the government profits from the lottery system. Say I were the sole winner of the $1.6 billion jackpot (lucky me). I could opt to receive either a lump sum payment of about $905 million or 30 annual payments averaging about $53,333,333 each, according to the Mega Millions website.

Either way, I'd get hit with a 24 percent federal withholding tax. That would subtract nearly $13 million from each of my annual payments or $217 million from the lump sum. And the top income tax rate is 37 percent, so I'd have to pay the difference between the two rates as well. That would leave me with "just" over $570 million, assuming I took the lump sum.

Then there are the state taxes. A total of nine states don't take a cut of lottery prizes, but the tax rates for the remaining 41 vary. New York's 8.82 percent tax on lottery winnings—the highest in the country—means my final lump sum payout would be about $490 million. The remaining $1.11 billion, plus the 40 percent of ticket sales supposedly allocated to education and other causes, would end up in the hands of the federal and New York state governments.

Meanwhile, some states that allow lotteries crush their competition with strict gambling regulations. In Texas, for instance, most forms of gambling are illegal. This means the government has a near-monopoly. The double standard for public and private gambling operations is obvious.

Ultimately, the lottery system is a kind of regressive tax on low-income earners. "If the promised return is by far illusory—and it is—it would be hard to argue that those purchases do not constitute a tax on those who believe the state's hype," Fiscal Policy Institute research associate Brent Kramer wrote in 2010, according to MarketWatch.

As Reason's Katherine Mangu-Ward noted in a 2012 appearance on NBC, "The people who can afford it the least are the people who are dumping the most money into the lottery." Poor people, of course, have every right to dream big. But while the lottery promises a chance—albeit a small one—to gain untold riches, it's always going to be the government that benefits the most.

Photo Credit: Richard B. Levine/Newscom

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  • John||

    Lottery's are a tax on people who either have money to burn or don't but are bad at math. It is just the government running a numbers racket. Whether the government running the numbers racket is better than the mafia running it is a highly debatable question.

    Since I am not required to buy lottery tickets, I really can't get to worked up about the government running a numbers racket one way or another. I can see the merits of arguments for and against it. If it is a bad thing, it is certainly not even close to being the worst thing the government does and therefore not really worth spending any effort of political capital to stop it.

  • Mickey Rat||

    Well, the mafia's numbers racket is off the books so you can get your winnings tax free if you can hide them from the government. You cannot hide lottery winnings.

  • John||

    True. But you still have to hide your mafia winnings because it was an illegal transaction and the IRS will expect to explain where you got the money. Actually, I would rather win the legal lottery and let the government have its taxes. It is found mony anyway.

  • Libertymike||

    John, you know football well. I mean the teams, their rosters, how they have been playing lately, who is hurt, and, to a large extent, I assume you know the match-ups, both individually and with coaches.

    However, I would wager that you would be better off directing your gambling money on the lotteries instead of on football betting.

    Same applies to me.

  • John||

    Absolutely. I never bet on football. The problem with betting on football is that I am a fan and thus often don't think rationally about it and see what I want to see rather than what is actually there. I don't gamble on sports. If I ever did, it would be on soccer or hockey or the WNBA or some sport that I have absolutely no rooting interest in and could therefore rationally analyze.

  • Slocum||

    Nah. Sports and casino gambling offer much better payouts than lotteries -- so you'd be much better off betting the same amount on those rather than lotteries. Of course, that doesn't mean you're going to win, but if you bet the same amounts, you'll lose much less on average than with state lotteries.

  • Echo Chamber||

    Voluntary taxes like the lottery are the best form of taxation evah!

  • MJBinAL||

    The lotteries are a tax on stupid. I can't think of anything I would more like to tax.

    We have an overwhelming surplus of stupid.

  • Homple||

    Well, yes. The whole purpose of the lottery is for governments to take in more money on the proposition than they pay out.

    We are expected to be surprised at this news?

  • John||

    The world is a confusing place for the millenials who write for reason. Next up, someone is going to explain to them that Casino games are set up for the house to always have an advantage or that hookers really don't love you.

  • Dont Tread On My Lawn||

    lol

  • Agammamon||

    . . . that hookers really don't love you.

    WHAT!? Goddamnit - TRIXIE!

  • Chipper Morning Baculum||

    John learned this the hard way.

  • John||

    No. I learned it is different for me. They don't love you but they love me.

  • Don't look at me!||

    It's easy to see how that could be.

  • Flaco||

    His name IS John, after all.

  • Bubba Jones||

    >hookers really don't love you

    That's why they react so strangely when you post about your breakup on facebook.

  • Ghancha||

    Came here to say that. It is explicitly what a lottery does.

  • GoatOnABoat||

    In Massachusetts, the Lottery Commission has a campaign bragging about how much money they give back to cities and towns. I listen to it and think, sure that's great, but how much money did you take in and keep for yourself?

  • Dont Tread On My Lawn||

    but, but, but Poor people is stupid,they literally don't know any better. We neeed to figure out concrete ways to protect them from themselves and their horrible choices... If only they had gone to college.

  • John||

    Maybe poor people enjoy the possibility of winning the lottery more than they enjoy the marginal utility of a few bucks spent buying tickets? I think they do and I don't see how reason or anyone else has any right to tell them they are wrong.

  • Dont Tread On My Lawn||

    "it would be hard to argue that those purchases do not constitute a tax on those who believe the state's hype,"

    Ya, on the other hand I would argue that it would be really easy to argue this.

  • Homple||

    I thought taxes were mandatory contributions to the government.

  • Rossami||

    No because head taxes have been ruled unconstitutional. All our current suite of taxes are voluntary (for interesting definitions of "voluntary"). For example, you don't have to pay income tax if you don't have any income. Figure out a way to live off the land and you can never pay a dime in income taxes. Sales taxes can be avoided by never buying (or bartering) anything.

    Tax-via-lottery is just an extension of the principle. A little more obviously voluntary than the others.

  • Bronze Khopesh||

    I'm playing the lottery right now and I just drew out a piece of paper with a big black dot on it. Is that good?

  • Unicorn Abattoir||

    It means you won a year's free subscription to The Atlantic.

  • Bronze Khopesh||

    Do I have to accept it?

  • Unicorn Abattoir||

    It does look like the worst option, doesn't it?

  • MatthewSlyfield||

    The best description of a lottery that I've ever heard is "Idiot Tax".

  • MJBinAL||

    The lotteries are a tax on stupid. I can't think of anything I would more like to tax.

    We have an overwhelming surplus of stupid.

  • Cy||

    I'm well aware of the odds and I still play. It's a lot of fun thinking about what 'could be.' It's cheap entertainment. It can also help with soul searching and spousal discussions.

  • Chipper Morning Baculum||

    ^This. People that poopoo others for buying a lottery ticket don't understand that all human action is motivated by psychic reward. When you buy a lottery ticket, you are buying a feeling of hope. To millions, that feeling is worth more than the price of the ticket.

  • Don't look at me!||

    Ohh how I hate the 1%!
    Ohh how I hope I win the lottery!

  • Ship of Theseus||

    You can do that without flushing money down a toilet (or giving it to the government)

  • Slocum||

    Why don't you just imagine a rich relative winning the lottery and giving you half? The odds are astronomical in both cases, but the 'imagine a rich relative giving you money' game doesn't cost you anything to play.

  • sudon't||

    C'mon, the fantasy has to have some plausibility.

  • Gilbert Martin||

    What happens if the winning lottery ticket was bought by a foreign national who was visiting the United States as a tourist?

    As a foreign national, he or she would not be subject to any state income tax or federal income tax either.

  • John||

    Oh you silly boy. You think being a foreign national keeps the government from taxing you on income made in the US. No way no how. We have the most voracious government on earth. They tax everything that happens in its jurisdiction and anything outside its jurisdiction involving its citizens.

  • Agammamon||

    All income earned inside the United States is taxed by the US no matter the nationality of the person earning it. The only way around this is to show that that income was *also* taxed by a foreign government - and even then, if they taxed it less than the US would have you have to pay the US the difference.

  • Robert Crim||

    Read the fine print! To cash the ticket, you have to appear with ID at the Lotto HQ, which means that (a) you are back in the U.S., and (b) you get to render unto Caesar that which is Caesar's.

    But, yes, if you are a foreign national and buy a ticket while visiting here, you can win just like anyone else.

  • loveconstitution1789||

    Never claim a lottery ticket without setting up a trust or other entity where you can hide your personal identity.

    Have a representative claim the winning for you and you avoid all the theives...except the IRS of course.

  • Bronze Khopesh||

    Paying a couple of bucks for the entertainment value of thinking you've got a chance doesn't seem like a waste to me.

    I've paid more to watch movies that I was told had a credible chance at being entertaining but that turned were unable to provide any evidence of being entertaining, and, in fact, were negatively entertaining. And this happens with movies all the time, yet no one calls going to movies an idiot tax.

  • Agammamon||

    . . . were negatively entertaining.

    Basically every non-comedic movie Will Ferrel has ever done.

  • MatthewSlyfield||

    Basically every movie Will Ferrel has ever done.

    FTFY

  • Cy||

    Little baby Jesus disagrees!

  • Bronze Khopesh||

    Well then I guess you guys have never seen any of his grindhouse vengeance rape movies that he does under the name Will Feral.

    They are masterpieces of graphically and artistically violent misogyny.

  • Bubba Jones||

    Will Ferrell did a non-comedic movie?

  • Flaco||

    Will Ferrell did comedic movies?

  • Dillinger||

    only funny thing he ever said was "strategery"

  • PeteRR||

    Once it gets over the $300M-ish mark it becomes worthwhile to buy a single ticket for each drawing. And I do. I avoid the betting pools and spending any more than $2.

  • Juice||

    Right? Why bother when it's only $100 M? Fuck that shit.

  • Don't look at me!||

    Merely crumbs.

  • Rossami||

    See above about lotteries being a tax on people who are bad at math. Assuming that you get no psychic or emotional value out of the ticket and are basing your calculation purely on expected financial return:

    1. The threshold at which it becomes "worthwhile" to buy a ticket is WAY above $300M.
    2. Once that threshold is reached, there is no principled reason to limit yourself to a single ticket. Assuming it's a fair game, the risk/reward calculation is identical. Buying two tickets doubles your cost but also doubles your expected average return.
    3. Betting pools (assuming they are managed with no overhead) are an implementation of #2.
    4. Limiting your spend to $2 sounds like a value judgement about how much you are willing to spend for the entertainment value. There is no purely economic reason why $2 or $1 or $5.

  • No Longer Amused||

    Odd to consider that when the mob runs a numbers game the payout is a larger percentage. Criminals are more honest than government.

  • markm23||

    Mobs often have to compete on price, because they can't send out men with guns to enforce a monopoly _every_ time it is challenged.

  • Cosmo Man||

    With a lump sum payout, after paying all taxes, you would have about $600mil remaining. If I have $600mil do I really care how much tax I had to pay?

  • Unicorn Abattoir||

    ^^^Not a true libertarian!!!

  • Just Say'n||

    He's true to his name, though

  • Robert Crim||

    Well, I'd rather have $700 million than $600 million. And, with the full billion, I could buy a brand new Ticonderoga class guided-missile cruiser, complete with atomic weapons, and then I wouldn't have to pay taxes at all!

    Long live the Second Amendment!

  • Weigel's Cock Ring||

    For the lucky son of a gun who does win it though, that prize will buy a shit ton of 40 ounce bottles of Schlitz malt liquor.

  • Chipper Morning Baculum||

    Dream big, Mikey.

  • Unicorn Abattoir||

    Genessee Cream Ale, thank you.

  • VinniUSMC||

    Was there a point to this "article"?

  • loveconstitution1789||

    America is a poopy head land and reason hates Trump?

  • Just Say'n||

    But, we can't reduce the lottery tax until we have fiscal balance. I learned that nonsense from Reason

  • Unicorn Abattoir||

    I won't be buying a lottery ticket. As an engineer I understand the statistical improbability of winning I'm far too cheap to pay the 2 bucks.

  • VinniUSMC||

    Yes, but someone will win it.

    You have a 0% chance of wining. I have a non-zero chance of winning. I am infinitely more likely to win than you. ;)

  • VinniUSMC||

    Damn, I misspelled winning. I guess I've lost already.

  • Unicorn Abattoir||

    Yes, but your likelihood of keeping your 2 bucks is much smaller (it's not zero, because there's a tiny chance you could win it back).

    Technically, with the odds and payout, you're making the right choice (assuming a single winner).

  • Robert Crim||

    Stop wining.

  • JeffreyL||

    The definition of lottery: The most efficient tax on the poor ever devised.

  • Don't look at me!||

    The definition of lottery: The most efficient tax on the poor population ever devised.

    FTFY

  • blondrealist||

    I rarely buy lottery tickets, but like Mr. Seyton, will probably buy one today. While I don't often buy lottery tickets, whenever I do, odds are high that if there's somebody ahead of me in line - that person buys several tickets, plus some scratch off tickets for other games. Oh well, it's a free country - and people are free to waste more money on lottery tickets than is prudent. If I do win, I recognize it will be quite unsettling. The state where I reside publishes the names of all lottery winners as well as the name of the town where they reside. The intrusion on one's privacy would be stressful. I'd seriously consider having my name legally changed after winning, then move. I sure as hell wouldn't pose for any photos for the lottery officials or talk to the press.

  • Mongo||

    If I win, Joe Set, I'll loan you 2 bucks so you can try to win the next one and you can pay me back later.

  • Robert Crim||

    I agree that no one else should buy a ticket. That assures me of victory!

    Well, sooner or later.

  • Robert Crim||

    P.S. How does one go about buying all the possible tickets? For $300 million, one is assured of having at least one winner (and one actually would have quite a few). If the payout is $900 million, the $300 million is deductible, which means the taxes will be only $222 million -- or pure profit of $378 million (more than double your money).

    Of course, there is a risk of more than three winners, which means you don't break even.

  • retiredfire||

    If you save all of your losing lottery tickets, you can deduct the amount from your taxes - up to a limit.
    Wouldn't it be fair for them to only tax you at the value of that limit?

    Sorry, lost my head for a second, thinking the government cares about what is fair.

  • ONTIME||

    You do have a choice when you stand in line to buy these tickets and you do know the tax consequences, so having others tell us what , why or how this is immoral to buy a Lotto Ticket makes no sense and in truth sounds a little bitchy and whinny.....Your money, it's legal and up front....

  • jb2000||

    45 years ago I used to read in Reason the argument for lotteries replacing direct taxation. Maybe I was reading that somewhere else.

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