Tuesday, September 23, 2003

The Truth About the Gaming Tax

Since the introduction of the 15% winnings tax on lottery games there have been many representations re the reduction in income and the negative consequence this will have on the industry and future tax revenue inflows. Some have even said that the tax will cause current government intake to fall significantly.

Illegal Market
There is no doubt that revenue intake by the lottery companies have declined, which is estimated to approximate 40%. Anyone who understands the gaming market would have predicted this effect, as there is a significant illegal gaming market, which has no doubt become much more attractive to the player as odds increase relative to the legal game. After all the illegal operator does not pay any taxes and usually has much lower overheads. The payout can therefore be higher. Similarly the player will not have to pay any winnings tax from the illegal bounty. It is a given that the tax will contribute to the growth of the illegal gaming market. We also need to remember that the drop pan game already has an illegal structure in place that existed for decades before the legal game. It is therefore not difficult for players to move back to that structure.

Government Revenue
The government is aiming to raise an additional $1 Billion by introducing the tax, while some are saying that the government will in fact realize less because of the reduction in revenue. It has been suggested to me that the advisors do not understand the gaming market and are therefore projecting incorrectly. Is this actually so? The only way to answer this is to look at the numbers based on the current fall off in sales and the contributions made to the government coffers.

The table portrays the 2002 revenue and tax structure based on information released by the Betting Gaming & Lotteries Commission.

The table shows the payout percentages to the winner and the various government agencies. At the bottom is the weighted average payout percentages based on 2002 revenues. From this we can compute what the government intake was and what it will be with a 40% fall off in revenues.

The second table compares the taxes under the old and new systems assuming a 40% revenue decline. This illustrates that even with a 40% revenue reduction the government agencies will collect $200 Million more than in 2002. This will be significantly less than the $1 Billion projected but will still be greater than the intake before the tax. An additional 5% decline in sales would, however, result in the government raking in less than before the introduction of the tax.

The tax will also redistribute moneys from the productive private sector to the government. If for comparison purposes we assume that salaries and other direct compensation to vendors amount to 10%, then the revenue fall off will cause a steep decline in moneys available for employment, directly and to vendors. From international studies we can also assume a multiplier of three times for earnings from the industry, which means that the $1,191 Million would become $3,573 Million in earnings. After the tax we could see that reduced to $2,145.

Charities (CHASE) will also receive substantially less. This implies a need for further support of charities from government and the private sector. Routing these funds to charities via government will have administrative costs, meaning less per dollar reaching the charities. Direct payments will always be more efficient.

Impact on the Economy
The immediate negative impact includes reduced employment and business activities. Ultimately this may result in lower corporate tax collections. In this example taxes would reduce as potential earnings fall from $3.6 to $2.1 Billion.

This analysis shows that although the government will collect more direct taxes from gaming operations, the overall net tax collections may be less because of:
- Less PAYE from reduced employment;
- Less profits tax from reduced company income levels; and
- The move to illegal gaming will mean greater expenditure on enforcement.
In addition to these factors, there is also the consideration that potential investments may not be realized because of the change in the payback ratios and the uncertainty of the rules. Also, the tax could possibly cause a prolonged stagnation of the gaming market.

Conclusion
The question to be asked is, have we measured the opportunity cost of introducing the tax? The tax may have been a short term solution, but what is the medium to long term implication. Already the tax will not have the desired revenue effect because of the revenue fallout, and in fact will not add much more. Added to this there may be a significant indirect negative effect on other future cash flows. Have we done the right thing to introduce this tax? I guess at this point only time will tell.

12 comments:

Anonymous said...

I always emailed this blog post page to all my friends, for the reason that
if like to read it then my contacts will too.

Here is my webpage - waist height ratio

Anonymous said...

It's a pity you don't have a donate button! I'd certainly donate to this outstanding blog! I guess for now i'll settle for book-marking
and adding your RSS feed to my Google account.
I look forward to brand new updates and will share this blog with my Facebook group.
Talk soon!

Here is my blog post metabolic rate calculator

Anonymous said...

Good day I am so delighted I found your blog, I really found you by accident, while I was researching
on Askjeeve for something else, Anyhow I
am here now and would just like to say thanks a lot for a
tremendous post and a all round interesting blog (I also love
the theme/design), I don’t have time to go through it all at the minute but
I have book-marked it and also added your RSS feeds, so when I have time I will be back to read much
more, Please do keep up the great jo.

Feel free to visit my homepage - weight loss calculator

Anonymous said...

I'd like to thank you for the efforts you have put in writing this site. I'm hoping to
check out the same high-grade content from you in the future
as well. In fact, your creative writing abilities has inspired me to get
my own site now ;)

Here is my weblog chapter 7 bankruptcy florida

Anonymous said...

Pretty! This was a really wonderful post. Thanks for providing this
info.

Feel free to surf to my blog :: how to lose weight fast

Anonymous said...

Fine way of telling, and pleasant piece of writing to take information about my presentation subject, which i am going to present in academy.


my homepage - diet plans for women

Anonymous said...

Hmm it seems like your blog ate my first comment (it was extremely long) so I guess I'll just sum it up what I had written and say, I'm thoroughly enjoying your blog.
I as well am an aspiring blog writer but I'm still new to the whole thing. Do you have any tips and hints for novice blog writers? I'd definitely
appreciate it.

My weblog; Liposom reviews

Anonymous said...

I am extremely impressed with your writing abilities and also with the layout on your blog.
Is that this a paid subject matter or did you modify it your self?
Either way keep up the nice high quality writing,
it is uncommon to see a nice weblog like this one these days.
.

Feel free to visit my blog: Lipo Slim

Anonymous said...

Wonderful blog! I found it while browsing on Yahoo News.

Do you have any suggestions on how to get listed in Yahoo News?
I've been trying for a while but I never seem to get there! Appreciate it

My weblog :: lift and glow pro and lift serum pro

Anonymous said...

Wɦat's up, for all time i used to cheсk webpage posts heгe early in the morning, because і
enjoy to learn more and more.

Feel free to surf too my web ƿage ... arthritis Pain management

Anonymous said...

CPO Money Back Guarantee, Returns and Cancellations.

Pull away to the left and try to just drive straight while Henry and Joe fire at
them. Constructed by a vile corporation known as Labycore the citizens became prisoners as well as test subjects.


My webpage - โกดังให้เช่า

Anonymous said...

hello!,I love your writing so a lot! share we communicate more about
your post on AOL? I need an expert on this space to unravel my problem.
May be that is you! Having a look forward to peer you.



My webpage: house renovations ideas ()