Lottery Taxation

A lottery is a game in which people purchase tickets for the chance to win a prize, such as money or goods. Some governments outlaw the game, while others endorse it and organize state or national lotteries. In the United States, people spent over $100 billion on lottery tickets in 2021. It is an important source of revenue for state budgets, and it offers a lucrative opportunity to market products to people who do not gamble or are not interested in gambling.

The concept of distributing property or wealth through lotteries has roots that go back centuries. The Old Testament instructs Moses to take a census of Israel and divide land by lot, and Roman emperors used lotteries to distribute slaves and property during Saturnalian feasts. Lotteries were brought to the United States by British colonists, but they initially received negative reactions from Christians and were banned in ten states between 1844 and 1859.

People play the lottery because they like to gamble, and it is a good way for them to spend their money. But there is more to it than that, and state-sponsored lotteries should be viewed as a form of taxation. They are dangling the promise of instant riches in an age of inequality and limited social mobility, and they should be subjected to the same scrutiny as other forms of taxation.

While the purchase of lottery tickets cannot be explained by decision models based on expected value maximization, more general models based on utility functions defined on things other than lottery outcomes can account for risk-seeking behavior. These models can also be adjusted to capture the impact of relative prices and the fact that people are not always fully informed about the odds of winning.