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April 11, 2012 12:19 PM Taxing Jackpots vs. Taxing Wealth

By John Sides

Any elected official who thinks the public is squarely on board with higher rates against upper-income earners should consider these results, then, and think twice.

From a Wall Street Journal op-ed by political scientists Brian Gaines and Doug Rivers.  Here is the crux of their findings.  On the one hand:

Sixty-one percent of respondents favored raising taxes on families that earn more than $250,000 per year and also 62% supported the “Buffett rule” proposed by President Obama (a minimum tax rate of 30% on millionaires).

But on the other hand:

In February, the online pollster YouGov asked a representative sample of 3,500 American adults what they thought would be a “fair amount of tax” to pay on lottery winnings. The survey specified different amounts of winnings, ranging from $1 million to $100 million. (The amount shown to each respondent was selected at random from a set of seven possible values.) Respondents gave their answers in dollars, and YouGov computed the implied percentage tax that they thought was fair.
Less than a quarter of respondents chose a tax rate of 30% or higher on any level of lottery winnings. The vast majority thought that a reasonable amount to pay was much lower, with the average being only 15%. Democrats and Republicans differed only a little: The average rate preferred by Republicans was 14%, compared with 17% for Democrats.

And tax rates were similar no matter whether the jackpot was $1 million or $100 million.

What’s even more curious is that these findings actually contradict an earlier study—also by a team of political scientists—that asked people to provide tax rates for different income levels.   There, respondents suggested, on average, that those with incomes of $750,000 or $1 million should have a tax rate of 37%.  And there was a significant difference in the rate suggested by Democrats (45%) and Republicans (29%).

So it does seem like people distinguish between the sudden, unexpected wealth of lottery winners and wealth more generally.  Maybe it appears more cruel to tax those who luck into their riches.



[Cross-posted at The Monkey Cage]

John Sides is an associate professor of political science at George Washington University.
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Comments

  • boatboy_srq on April 11, 2012 2:49 PM:

    Perhaps another item that isn't considered here is the source of the income.

    "Lottery jackpot" has the connotation of a windfall from participating in the state/regional lottery - in other words, a public drawing. Lotteries have been intended to pay for a number of public programs, mostly education-specific; regardless of where the proceeds go, there is the assumption that winning provides a payment from the state. Taxing income from a public source is different from taxing income from a paycheck or investment. There's the presumption that since it's a public resource, taxing the winnings is doubly unfair: simultaneously, the payout is from the state, which makes taxing it seem unfair, and the tax mentioned in the poll is income (presumably federal income) tax, which would be unfair for the federal government to tax winnings of a state drawing.

    If the poll were on taxing a PCH sweepstakes win then we might see different numbers; but state drawings are peculiar creations with substantial emotional and cultural baggage attached which prevent reasonable expectations either of winning or of keeping those winnings.

  • Equal Opportunity Cynic on April 11, 2012 3:18 PM:

    I think it's simpler than boatboy speculates. Working class people identify with lottery winners, often also working class. They don't identify with $250k earners because there aren't publicized cases of "one of us" suddenly coming into a $250k/year income stream.

  • RalfW on April 12, 2012 10:33 AM:

    A couple thoughts:
    1) Similar to EOC above, I think most people assume lottery players are not already rich people. This may or may not be true sociologically, but perception-wise, we see lottery tickets being bought by average Joes in 7-11s. So these people should get a break, right? The notion that lotteries already pay into government coffers is interesting and possible, too.

    2) Even the biggest payout in the survey, $10 million, is less than many who should be subject to the Buffet rule make in a single year. Given just how filthy rich these 'high fliers' are, well hell yes, they can pay 30% thank you very much.

  • RalfW on April 12, 2012 10:38 AM:

    Oops, I misread. Second reading I see the lottery question maxed out at $100 million. Not many hedge funders make that scratch (A few have from time to time).

    I do wonder what the rotation of prize levels was? And a Wall Streeter making $5 mil a year is still looking at a lifetime earnings picture of $150 mil, plus gains on options, plus income on the 10s of millions reinvested, etc.

    They're pulling in very serious dough year after year, often in ways that leave a lot of other people holding the bag (see Bain, bankruptcies & layoffs for example). There are social costs to these raiders activities. And yet they get taxed as L.T. cap gains rather than income. Pretty unfair to the average person when explained by Warren Buffet.

  • wiki on December 15, 2012 8:06 AM:

    The suddenly think there is a conspiracy because the teams that had bigger percentage numbers didn't end up with the first pick. But what they need to understand is it is a LOTTERY. Just like any lottery even the longest longshot can produce a winner.

    BTW...thekid it's always the bottom 14 teams in the league in the lottery. It doesn't matter what your record is. If you didn't make the playoffs, then you particpate in the Lottery. Thanks.
    Regards,
    Euro Chance100