What’s the proper way to tax personal saving and investment? It’s a great question, and under current tax law, we have lots of different answers! Specifically, we have four of them, which I’ll get to in a moment. But...
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- Are Lottery Taxes Regressive? (And What Does "Regres...
Are Lottery Taxes Regressive? (And What Does "Regressive" Mean Anyway?)
In the debate over state-run lotteries, a common question is whether lotteries are a regressive tax—that is, whether they place a heavier tax burden on the poor than on the wealthy. Many studies have attempted to prove or disprove this, and the majority of experts believe lotteries are regressive.
One tool used to analyze lottery data is sales records in various zip codes. If there is a strong enough correlation between high sales and low per capita income in a certain zip code, the lottery is said to be regressive in that area.
While zip-code studies are useful to a certain extent, there are limitations. First, lottery players often purchase tickets in zip codes in which they do not reside, e.g. many people purchase tickets near their workplaces.
Second, sales/zip-code data are sometimes interpreted incorrectly. The misinterpretation hinges on a misuse of the word “regressive.” A regressive tax is one that falls disproportionately on low-income individuals and takes a larger percentage of income from low-income taxpayers than from upper-income taxpayers. Regressivity measures the percentage of income spent on taxes, not the dollar amount.
If a person who makes $15,000 a year purchases $3,000 worth of lottery tickets, she will spend 20 percent of her income on the lottery—quite a large portion (about one-third of that amount will be in the form of implicit lottery taxes). However, if an individual who earns $1,500,000 a year spends the same amount, it will be a drop in the bucket—a mere .2 percent of her income. Taking into account only the dollar amount spent misses the point.
Our current federal income tax is progressive, meaning rates rise as income rises—the opposite of regressive. Many experts have argued for a flat tax, with one rate for all, but virtually no one would argue for a regressive income tax, where rates rise as income falls; such a tax would be seen as unfair and unduly burdensome to the poor.
Some people mistakenly believe a tax must impose a higher dollar amount on the poor in order to be regressive. For example, a recent Lottery Post article states:
National studies frequently show ... that the dollar amount spent on lotteries generally does not fluctuate much over income brackets.
However, the article is titled, “Study proves lottery not 'regressive tax'.” If people in different income brackets spend the same amount on the lottery, then the implicit lottery tax (the portion of proceeds kept by the state) is regressive. Therefore, this study actually shows that the lottery is regressive.
For more information on lottery taxes, click here.
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