Monday, August 16, 2010

Congress Considers Legalizing, and Taxing, Online Gambling

This New York Times story makes for some interesting reading. Many members of Congress are pushing legislation that would overturn the 2006 ban on online gambling. A major rationale for this effort is the fact that legalizing online gambling would allow the federal government to implement a tax on the activity, thus helping to alleviate the fiscal crisis our country is currently facing.

There is considerable opposition to the move, however, particularly from Republicans that have ties to the Religious Right, which traditionally supports government efforts to ban gambling. It will likely be a difficult fight to get the legislation passed. Nevertheless, lifting the ban is sound public policy and should be done as soon as possible.

Government efforts to prohibit gambling stem from a personal belief among certain groups that gambling is inherently immoral. This ignores the obvious fact that it is not the government's job to enforce public morality. Citizens can hold a wide variety of opinions about the ethics of gambling, but it should not be the government's responsibility to police such activities. We might as well speak of the government passing laws to prohibit lying or the use of profanity.

Furthermore, the 2006 ban on online gambling has been completely ineffective. It prohibits American financial institutions from transferring funds to and from online gambling establishments, but this merely resulted in driving it into the underground economy and did little or nothing to actually stop Americans from using online gambling sites. According to the article, Americans annually spend upwards of $6 billion on online gambling sites. As with the efforts to ban alcohol during Prohibition, and modern efforts to ban to the use of marijuana, such government measures are always doomed to failure.

Indeed, the only real impact such government bans have had is to deny the excise tax revenue that would otherwise be obtained from such activities. Estimates suggest that the federal government could derive $42 billion over the next decade from taxes on online gambling. This may not be all that much when set against the magnitude of the fiscal crisis, but it's $42 billion closer to a solution.

Ultimately, the long-term solution to our budget problems will involve a massive downsizing of the federal government and a less intrusive taxation system than the one which currently exists. A major aspect of a truly Jeffersonian tax policy will be the use of excise taxes on specific products and activities. Online gambling is the kind of activity crying out for an excise tax, and the first step towards obtaining it is, obviously, legalizing it in the first place.


Matthew said...

Since you mentioned a less intrusive tax system being necessary, I'm wondering what you think of the Fairtax. Because it is based on peoples consumption rather than penalizing them for being productive, it seems to me that Jefferson would approve of it.

lwbiii said...

Who would actually pay a tax on gambling? The winners since the winnings would be smaller because of the tax? The winners already pay the highest rate of income tax on their winnings. The middlemen? They will just reduce the winnings to cover the tax. So, bottom line, the winners will pay whatever tax we impose on gambling. Not a bad way to raise money.