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Friday, July 31, 2009

Heads you win, and they do, too

Oregon may have just increased income taxes on the wealthy, but Hawaii's going in a different direction. They're taxing all gambling winnings, with no deduction for gambling losses, even those incurred on the very same day as the winnings. This is the kind of thing that Senator Packwood used to call "tax simplification."

Comments (26)

Good. Gambling is totally nonproductive activity, quite similar to the entire financial wizard world of derivatives and collateralized debt obligations. Finance was once a tool to capitalize productive investment; now it is simply gambling, and gambling has always been gambling, a tax on people who are bad at math in most cases or, at best, a hobby.

When hobbies make money they are taxed; when you spend money on your hobbies you don't get to deduct the cost (unless you're trying to pretend it's a business).

Prostitutes don't get to deduct the cost of birth control, although they are required to report the income. Gamblers should be treated the same: All winnings taxed, all losses ignored.

Hobby expenses are deductible against hobby income.

But what happens when gambling is your livelihood? What if you make a living playing poker? Why can't your losses be deducted as a business expense. This law would seem to make those people pay taxes on all revenue regardless of the cost to produce that revenue.

Silly ... how many gamblers actually report their winnings in the first place? Why not tax drug dealers and Ponzi schemers while we're at it? * If we already do, my apologies - years ago, tax law was the last class of a long day for me.

"Why not tax drug dealers and Ponzi schemers while we're at it?"

that is why we need to abolish the IRS, institute a type of national sales tax - like the "Fair Tax" and tax the drug dealers, tourists, underground econmy, etc...

I know many people who do a lot of "cash work" that never gets taxed. A national sales tax would make life easier for most and actually bring in more revenue.

Interesting discussion here. I don't know if Hawaii's new rule applies to professional gamblers. And prostitutes deducting birth control? I'd have to look that one up -- sounds plausible.

"Why not tax drug dealers and Ponzi schemers while we're at it?"

We do - taxable income includes income from illegal activities. Al Capone's legendary bust for tax evasion is only the most famous example.

CNBC's recent show about marijuana in the U.S. had a fun tidbit in this area. The producers found a marijuana bar in California operating in the guise of a juice bar. The proprietor said that even though they were operating an illegal business they made sure they paid their taxes - something like over $350K in the past year or so. His attorney had strongly advised them to take this step.

Could a Hawaii "gambler" claim their expense instead as a gift, if the recipient is governmental or a non-profit?

No "gift" treatment - gift must be motivated by a "detached and disinterested generosity." That doesn't occur when a casino tells you to pay up.

"Silly ... how many gamblers actually report their winnings in the first place?"

Under certain circumstances the casino will issue a 1099 to someone who hits it big at the track, the slots or the tables in which case you had better report it unless you want them to come after you. I'm not sure what the threshold is that triggers this, but it tends to happen in scenario's where the gambler had won a lot of money on a bet with long odds. One time I won $1,500 at craps in Vegas, and when I went up to the cage to cash in my chips they asked me what game I was playing and whether I won it on a place bet or by line betting. I'm a line better so they said "O.K." and let me walk off without filing out any paperwork. An old buddy of mine's dad won 15K at the horse track on a trifecta and they 1099'd him on that one.

The trigger for a form W-2G (not sure when/if a 1099 comes into play) is $1200 or more in winnings on a single wager. Of course all gambling winnings are supposed to be reported, but the casino must send in the paperwork if your individual wager win was $1200 or more.

Not sure if there are any casinos in Hawaii, I don't know of any. So this'll mostly just be another little dent in the already struggling economy of Las Vegas (and other gaming jurisdictions to a lesser extent).

As for gambling being a totally nonproductive activity... I suppose that depends greatly on your point of view. One could quite easily say the same of any form of entertainment, such as movies, music, all forms of art really. But the gaming industry does provide hundreds of thousands of jobs across the country (including my own, to put my own bias on the table)... it is no less "productive" than any other service-based industry.

Oh, and as to the sensibility of the tax measure itself... it's just about exactly the equivalent of taxing capital gains based not on the "gain" from the sale, but the total value of the sale.

For example, you buy stock for $10,000 and later sell it for $15,000 which gives you a capital gain of $5,000. Normally you'd be taxed on that $5,000 but this Hawaiian law would tax you on the $15,000 instead. Essentially, taxing you on the $10,000 you spent in the first place (which presumably, since you had it to spend, had already been taxed previously).

Whatever you may think of the gaming industry, this law is simply insane.

There's nothing insane about favoring productive activities over nonproductive ones. Nice try in suggesting that gambling is like capital investment but no sale there --- productive investment is using money to make both sides of a transaction better off.

I prefer this pizza to $10, and you prefer $10 to the pizza, so we exchange the $10 for the pizza and we both are ahead because we have what we prefer.

Compare gambling, a zero-sum game where nothing of value is created and the main opportunity is in preying on people with an illness that makes it difficult for them to resist the adrenal rush from "games of chance."

There's no reason that we shouldn't make money "earned" gambling fully taxable at the highest rate and disallow any "expenses" - it's simply a social choice. If it discourages some gambling, great. If it doesn't, at least it helps raise more money for the public purse, which is tapped for many of the social maladies that gambling causes.

P.S. Besides, we know one thing about gamblers: they don't understand expected values, so taxing them fully and disallowing losses as "expenses" doesn't really change their calculus at all.

Also, since the tax form doesn't issue except on winnings above a certain level per single wager, what are the expenses of that wager? None.

Ya know, they could solve all this revenue problem without raising anybody's taxes!

Make drugs legal and taxable!

Instead of the underworld getting all that money the government could get it.

Oh yea, I forgot, this is America, we rather live in denial than reality.

When the tax laws are used to single out and punish otherwise perfectly lawful activities things get a little Orwellian,

You mean like the tax laws that tax earned income paid for labor at a much higher rate than capital gains given to capital? Would that be the Orwellian effect you're talking about?

Are the accelerated depreciation schedules "Orwellian"? How about the huge Hummer tax credit that was in the code for so many years? The oil depletion allowance? The synfuels tax credit that lets utilities buy coal, spray it with a little diesel oil and call it "synfuel"? Would those be "Orwellian"?

Would it be Orwellian to design a tax system to reward actual goods (productive investments, savings, labor) and to discourage bads (consumption of nonrenewable resources, pollution emissions, creation of toxic wastes)?

I've always found it curious that they tax any interest earned from savings accounts, every year (essentially taxing you repeatedly for money you've already paid taxes against - and then complain that "Americans aren't saving enough".

Leaving aside the wisdom of taxing interest on savings at all, how is it that they are taxing you repeatedly? The principal in the account is not taxed, and the interest is only taxed once, and is then considered principal.

George Anonymuncule Seldesm, you are just way over the top in your passion here. Tax codes are supposed to be a revenue source for government, and ought to endeavor to be no more than just that. When they veer off into the realm of trying to shape human behaviors, they become (1) incomprehensible, (2) a blunt object tool for those making subjective value judgments, and (3) unfair.

G Joubert: You mean shaping behavior -- which all taxes do -- thoughtlessly is OK, but shaping it intentionally is bad? When windows were taxed by the amount of glass, we got houses with tiny slits; when chimneys were taxed, we got shared chimneys; when tea was taxed, we started drinking coffee. When labor is taxed, we get more people replacing machines; when domestic earnings are taxed and overseas earnings allowed to be manipulated so appear as intra-corporate transfers, jobs go overseas.

Anyone who thinks there is a "neutral" tax code hasn't given it much thought.

Objectively -- dispassionately, if you like -- our tax system can be accurately described as one in which we tax precisely those things we claim to want more of (jobs, investments, savings) while lightly or not-at-all taxing those things we claim to want less of (pollution, toxics, consumption on non-renewable resources). Thus, it's like driving with your left foot jammed on the brake and your right foot flooring the accelerator.

Everything ought to be taxed the same. If a particular industry needs a regulatory scheme, it should be taxed additionally no more than the actual costs to regulate it. No value judgments interposed. Save us from governmental value judgments. They're always bogus.

If a particular industry or activity is not wanted then outlaw it, if the citizens agree that they want it outlawed. I believe Hawaii is at least consistent in this regard, in that they allow no gambling and they have no lottery.

I don't believe this current change to the Hawaii tax law wrt gambling will endure. It's stupid. Guy sits down at a blackjack table and on the first hand wins $100. Then on the second hand he bets it all, and loses that $100. So he walks away. Under the Hawaii law he owes tax on that $100. Stupid.

Seems like a whole bunch of value judgments here: "Everything ought to be taxed the same. If a particular industry needs a regulatory scheme, it should be taxed additionally no more than the actual costs to regulate it. No value judgments interposed. Save us from governmental value judgments. They're always bogus."

Wasn't it a governmental value judgment that got the Internet created? And the Interstate Highway System, BPA, and, indeed, caused Oregon to be settled?

As for your next idea, why should we be forced to adopt prohibitionist strategies against social ills instead of recognizing that we can't prohibit many behaviors effecitively (even if we were willing to become even more of a police state to do so) and instead sensibly taxing them?

We know that there is a whole range of activities (prostitution, gambling, drugs, alcohol, cigarettes, porn, guns), prohibition doesn't work. Instead, prohibition simply helps corrupt the political process and the police, promotes organized crime by making it very profitable to supply the prohibited articles in the black market. Whereas a tax can be used to help pay for the social costs of an activity that it would be unwise to prohibit. If you think government is always "bogus" then perhaps it's because you have a black and white view of how government should act and in your model, government shouldn't encourage social goods or discourage social "bads" -- activities that impose burdens on those who don't engage in them.

The only reason why Hawaii passed the rule is because it has no gambling. The only other state like that is Utah.

Instead of the underworld getting all that money the government could get it.

Riiight, because everyone knows those in the "underworld" pay up on their taxes.

Compare gambling, a zero-sum game where nothing of value is created and the main opportunity is in preying on people with an illness that makes it difficult for them to resist the adrenal rush from "games of chance."

Give me a break with that "illness" BS. You either choose to gamble, or you dont. Same thing with saying people who rob banks or molest children made a "mistake." There are no mistakes. Only decisions to act.


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