David R. Henderson  

John Goodman on Inequality and Lotteries

Some History of Deposit Insura... Three Thoughts on Italy...
I can't think of anything in the private sector that even begins to compare to this reverse Robin Hood redistribution from the poor to the rich and the nouveau riche. And remember, in order to pull it off, government first has to establish a monopoly, keeping private competitors (who would at least raise the poor bettor's expected return) out of the market.

If you really care about the ethics of income distribution (more on that in a future Alert), a lottery has wonderful heuristic value. For example, if you're the kind of person who thinks that rich people don't deserve their riches, that their wealth is the result of good fortune and chance, or that income is somehow collectively rather than individually generated--that is, if you are inclined to believe that life itself is one big lottery--then in your search for genuine unfairness, a real live lottery winner is hard to beat.

After all, the lottery winner didn't do anything special. He did what everybody else did: he bought a ticket. His immense winnings are by definition the result of good luck and random chance. He surely did nothing to warrant, merit or deserve his wealth. Unlike in the economy, the winner's winnings really are made possible by the losers' losses. The lottery's rich get rich precisely because the lottery's poor become poorer.

This is from John Goodman, "Inequality," March 21, 2011. Goodman goes on to point out that when his organization, the National Center for Policy Analysis, released a study in Washington on the excessive (excessive relative to the externalities) taxation of tobacco and alcohol, he couldn't persuade any "liberal" think tanks or activist groups to join him, even though those taxes are regressive.

That reminds me of an interaction I had with the late Joe Pechman of Brookings at a large session of the American Economics Association (if memory serves, it was in New York in December 1988 or January 1989). Joe was on a panel of economists discussing tax policy. In his talk he argued passionately that the federal tax system should be more "progressive" than it was, that is, take more money than it did at the time from higher-income people. In the same talk, he advocated substantial increases in federal taxes on tobacco, alcohol, and gasoline. In Q&A, I asked Joe how, if he wanted more progressivity, he justified increases in these regressive taxes. He answered angrily that if people chose to use those goods, then tough. "Tough" wasn't the word--I can't remember the word--but that was the tone.

One critical comment on John's excellent post: He points out that "liberal" academics are among the few people who care about inequality but he doesn't explain why, if they really care, more of them are not critical of lotteries. It does seem strange.

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COMMENTS (16 to date)
Devon Herrick writes:

It is intriguing that opposition to lotteries comes mainly from religious conservatives on moral grounds. Progressives and liberals tend to support lotteries even though there is overwhelming evidence lotteries are a public transfer from low-income people.

Joey Donuts writes:

One critical comment on John's excellent post: He points out that "liberal" academics are among the few people who care about inequality but he doesn't explain why, if they really care, more of them are not critical of lotteries. It does seem strange.

Since most state lotteries claim that half the proceeds go to education, why think this is strange?

Floccina writes:
if they really care, more of them are not critical of lotteries

Could it be because lotteries are often sold as funding higher education?

Gary writes:

It is odd. This cause would let them limit individual freedom AND fight inequality, two liberal favorites.

Tom Ault writes:
One critical comment on John's excellent post: He points out that "liberal" academics are among the few people who care about inequality but he doesn't explain why, if they really care, more of them are not critical of lotteries. It does seem strange.

I'd argue that liberals (or conservatives for that matter) don't spend much time opposing lotteries because the popularity of the state run lotteries would render such opposition futile. Policies to redistribute income from rich to poor are more likely to be implemented than abolishing the lotteries.

David C writes:

Lottery participants choose to have their wealth transferred from the poor to the rich. Nobody has a choice in the game of life. I can understand that belief. The thing about alcohol and tobacco I can't explain. Maybe nobody agreed with the estimates of the negative externalities of tobacco and alcohol, but that seems unlikely.

Sam Wilson writes:

I don't find much strange at all. Lotteries, tobacco and alcohol are low status consumption goods. Academics can assert their relatively high status by condemning them.

John Goodman writes:

I agree that legislators often promise to spend lottery proceeds on education. They made that promise in Texas and then reneged. But suppose they do spend the proceeds on education. If all that means is raising salaries for the existing set of teachers, I can't see that poor kids benefit. If it means firing bad teachers and hiring better (more expensive) ones, that would be a benefit to poor children. But when has that ever happened?

Buzzcut writes:

Regarding alcohol and tobacco taxes, while they may be excessive compared to externalities, perhaps that is not the main focus of taxation.

Alcohol and tobacco taxes are high because we will pay them without batting an eye! We're addicts, we like our booze and smokes so much that we won't decrease our consumption much when taxes go up.

In that regard, high alcohol and tobacco taxes are almost perfect from a taxation perspective. Probably only gasoline could rival that. Perhaps the little thrill you get when the lottery balls are picked is also addictive, thus making the lottery a similar kind of tax.

Maniel writes:

"... in order to pull it [a regressive tax] off, government first has to establish a monopoly..."
Well said. This applies to the important regressive taxes, Social Security and Medicare. The FICA taxes for each are regressive (they are a higher percentage of a smaller income) and since those taxes lay first claim on retirement and medical savings for most working people, they are effective monopolies. Not only that, they tend to benefit the wealthy who, as a class, tend to outlive the poor. It's no longer clear to me which parties stand for what, but I suspect that, for whatever reason, those programs also find support among liberals.

James Oswald writes:

The main purpose of lotteries is not to transfer income. It is the utility people get out of the suspense and imagining what they would do with all that money. It's a relatively inexpensive consumption good, and since it is voluntary, it is not a tax.

David R. Henderson writes:

@James Oswald,
Good point, but what makes it a tax is the monopoly provision. Without the monopoly, the odds in the buyer's favor would be better and the government would make close to zero because it wouldn't be able to compete successfully with the "numbers" providers.

Tom West writes:

So, is the optimum solution to tax people progressively some small amount which is then put into a weekly or monthly pot?

Everybody gets to dream about what they would do with the money, but the tax is not proportionally taken from the poor?

Heck, it might even make the government more popular :-).

(Personally, the idea of the government involved in the lottery *really* ticks me off. Nothing like government money putting up ads that more or less push the idea that the way to get ahead is not to work study hard and work hard, but to be lucky. As if that's a lesson that young people (or old people) really need to hear repeated again and again... *sigh*)

Nick Rowe writes:

I made the same argument 6 weeks back!

"An ultra-quick Google says that one quarter of Canadians buy lottery tickets weekly. That means, at an absolute minimum, one quarter of Canadians want (have a revealed preference for) more inequality. They put themselves behind the Rawlsian Veil of Ignorance, and vote for more inequality."


David R. Henderson writes:

@Nick Rowe,
Very nicely put.
Fellow (former) Canadian,

Anchor Dragger writes:

People like lotteries because...

they like to dream of getting a lot of money without working for it.

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