The Lottery is a national institution, and people spend an extraordinary amount of money playing it. The idea is that, even though the odds of winning are extremely long, some lucky person is going to get something spectacular. The reality is that most people do not win, and many are left with nothing. And that’s a problem.
State governments promote lotteries as ways to raise money, and they do—but the message obscures how much of a regressive tax they really are, as well as how meaningful that revenue is in their broader budgets. This is a shame, because the real goal of state government should be to provide an array of public services that help people live their lives as best they can, and that doesn’t necessarily require the kind of massive taxation that would create huge inequality between rich and poor in a society with such an extensive social safety net.
But in the United States, state lotteries make up more than 2 percent of total revenue, and that’s a lot of money for a country with relatively low taxes overall. It’s enough to fund public colleges and universities (and a few perks for the middle class) but not to reduce taxes on most people or dramatically bolster public expenditures. That’s a trade-off that isn’t particularly good for the country, and it has its roots in the very beginnings of state lotteries.
Lotteries first appeared in Europe around the 15th century. In the Low Countries, towns held lotteries to raise funds for town fortifications and for helping the poor. These early lotteries were private, and they had a very different feel from public ones that followed later. The early lotteries used numbers instead of letters, and the prizes were articles of unequal value, such as dinnerware. Later, people began to play for cash, and in the 17th century Louis XIV and his court were among the most active participants in French lotteries.
In the United States, lotteries have become more popular as more state governments have legalized them. When a state legalizes a lottery, it often finds that the surrounding states will follow suit pretty quickly, which helps the jackpot sizes and attracts players. Multi-state lotteries—such as Powerball and Mega Millions—have also made them more popular.
When someone wins a lottery prize, they typically have to choose between annuity payments or a lump sum. The choice is important because the time value of money has an impact on the overall value of a prize, and it’s usually less expensive to receive a one-time payment than an annuity. Winnings are subject to income taxes, and the winner is usually required to pay federal income tax on the winning amount at the time of the award. A person who elects to take a lump sum must also decide whether to invest the winnings or use them for another purpose. The average winner of a large prize in the United States takes home about one third of the advertised jackpot, after income and other taxes are withheld.