A Curious Miscellany of Items Philosophical, Historical, and Literary

Manus haec inimica tyrannis.

Tuesday, March 19, 2013

Living off the Avails...

Inside a government-sponsored anti-gambling initiative
When the government becomes the people’s pander, when it actively and consciously encourages vice, immorality, and plain folly among them, then that people is nigh doomed — it is not necessarily the end of civilization, but it is certainly VIP seating for the event.

My home city is deep in debate about whether it should approve a giant casino and “entertainment complex”. I use the word “debate” with a sense of reservation, since it implies that there are roughly an equal number of people on both sides of the issue. In truth, I have yet to personally meet a single person who supports this casino, though I’m sure such people are out there somewhere, especially among assorted developers and those city councillors who are deep in their pockets. I do after all run in rather rarefied circles.

Rather than argue over all the pros and cons of the casino, I would simply like to consider one argument offered in support of it, since it is the argument that is most commonly trotted out when the discussion comes up. The argument — let us call it the Revenue Argument — at its simplest is this:

THE REVENUE ARGUMENT: The gambling revenue that will flow into city coffers from a casino will allow us to finance badly needed infrastructure, such as new subways.

Presumably, that revenue will come in the form of either (i) levies on gamblers, or (ii) levies on the winnings of casinos, or else (iii) from the enlarged tax base created by the new jobs casinos will provide. These are not mutually exclusive revenue streams, and the city may derive funds from all of them. However, in truth they are all reducible to (i). For example, in order for those new jobs to become a reality, the casino must make money from gamblers sufficient to pay the workers (I leave aside the very real question of the quality of these jobs and whether there aren’t better ways of creating better jobs). So the new jobs are funded ultimately from the losses of gamblers. Similarly, and more obviously, in order for a casino to be able to pay taxes, it must make profits; these profits ultimately come from — wait for it — the losses of gamblers.

Thus, the new revenue must come one way or another from the gamblers themselves. The only question is whether the money will come from their losses (via taxation of the house’s revenue and/or the revenue of its employees) or from their winnings (via direct taxation of gamblers’ gains). Again, because these are not mutually exclusive, it doesn’t really matter whether gamblers win or lose, since the government will get its cut either way. Just as the house never loses, so neither it seems does the government. This puts the government in the less than upright position of having to positively encourage gambling, since they make their end by having people gamble (win or lose); they make nothing when people do not gamble. Call it government as public croupier.

So who is the net loser? Well, since both the house and the government must always make their end, it is necessarily the gamblers who must lose. Hence, what the Revenue Argument proposes, in essence, is that public projects be funded by gamblers, and that gamblers ought to open their pockets to pay for our city’s subways. This naturally leads us (or should lead us) to the question: What justifies forcing gamblers to pay for our services? There are a few possible justifications, each of them dubious, to say the least. Let us consider them in turn.

1.    Gamblers are Vicious and Immoral

Many often see gambling as a vice and therefore the people engaging in it as somehow vicious. They might characterize the very folly of gamblers as a kind of vice in itself. Or they might characterize gamblers as wastrels, idly throwing away unjustifiable amounts of their time, talent, and treasure on activities of no social benefit when they could be better employed elsewhere to the common good.

Of course, it may not be simply that gambling is of no net benefit at all, since the gambler can be assumed to derive some pleasure from gambling, no matter how small and fleeting it may be. Instead, let us think of it in opportunity cost terms: although gambling is pleasurable to the gambler himself, the resources he devotes to it could have been better employed elsewhere and therefore represents net social loss.

I think there is a good case to be made for this view of gambling as wasteful and vicious, but I won’t make that case here. I will simply assume it to be true for the sake of argument. What tends to follow from viewing gambling as immoral is that it is now seen as justified to pick gamblers’ pockets to pay for public projects. This picking of pockets can either be done directly, through taxing his winnings, or indirectly, through taxing his (more certain) losses, which represent the winnings of the house. In either case, the money ultimately comes out of the pockets of gamblers, as has already been explained.

The main differences between taxing gamblers and taxing the general citizenry are that (i) this subset of citizens derives some pleasure from the activity taxed, (ii) they engage in it willingly, and (iii) they are viewed ex hypothesi as immoral and their activity is therefore to be discouraged. These characteristics of taxation of gamblers generally lead observers to view the taxation more favourably. After all, we can discourage bad behavior and make the bad people pay for public goods as a sort of penance for their voluntary sins. And it magically makes wastefulness efficient. This favourable view is wrong.

First, if the activity is truly immoral and if gamblers are by extension guilty of vice, then wouldn’t the logical answer to be to make the activity illegal? We certainly shouldn’t be encouraging it by building flashy new gambling facilities with attached “entertainment complexes” for the whole family. As I said before, in order for the government to make its end in this racket it must encourage more gambling, which is rather inconsistent with the claim that it is justified in taxing gambling because such taxation will discourage it. The government’s position here is at bottom incoherent.

Secondly, assuming gamblers are somehow vicious, I don’t see a close rational connection between mulcting them and rewarding non-gamblers with the proceeds, which is what we are doing when we purchase public goods for the latter with wealth confiscated from the former. The gambler may deserve punishment, but it does not logically follow from this that non-gamblers deserve to profit from his vice. Criminal sanctions may be appropriate for certain vicious behaviours, but it seems to me that redistribution from gamblers to non-gamblers would have to be justified on the basis of the latter somehow being victims of the former. This is a stretch. But even if it’s not, we come back again to my earlier point: when someone commits a crime and there is a victim involved, it may be appropriate to penalize the criminal by making him pay compensation to the victim. But we do not make it part of public policy to positively encourage crime and make it attractive so that more victims can be created and more money be paid to them. That is what is commonly called a “racket”, and a very degenerate one at that (more on rackets later). Yet this is precisely what we are doing when we purposely create more casinos, encourage more gambling, and then tax it on the basis that it does harm to society. Either gambling is morally tainted or it isn’t. If it is tainted, society ought not to avail itself of the proceeds of the crime, any more than a pimp ought to avail himself of the proceeds of his prostitutes.

On the other hand, if gambling is a vicious though victimless activity, then assuming that we are conservative enough to want to punish victimless crimes, we ought to do so without rewarding people who are not victims, otherwise we make the general citizenry share in the proceeds of vice, which is wrong. (Of course, in a more liberal approach, we shouldn’t be punishing victimless crimes at all. But that’s a debate for another day.)

If you and I want things like new subways, we ought to be willing to pay for them. We are not justified in paying for them with the money of gamblers except insofar as their behavior is somehow either unjustly depriving us of those subways (which it is not) or insofar as they will be the exclusive users of the subways (which they won’t be). To make them pay for our subways is — pardon the pun — free riding, a shakedown.

Far from justifying the Revenue Argument, viewing gambling as a vice makes the Revenue Argument an instrument of our own corruption, insofar as it would have us living off the avails of immorality.

And yet, the way governments and casino developers typically present it, the Revenue Argument sounds like a wonderful alchemical method for turning base vice into golden virtue. And much like the claims of alchemy, this one is too good to be true.

2.    The Casino Industry is Vicious and Immoral

I once had a professor in a class on probability and inductive logic explain to us that lotteries are a government’s way of taxing people who can’t do math. We may be neutral on whether or not gamblers themselves are immoral, while still believing that the industry that profits from them is immoral. Maybe gamblers are gullible, or sick, or weak, and therefore shouldn’t be taken advantage of. If so, it may be argued that it is hence justifiable to mulct casinos in order to penalize them for fleecing the sick, the weak, and the stupid.

Notice that on this account, much of what I argued above would still apply. First, as I’ve already explained, the money mulcted from casinos ultimately comes from the putatively sick, weak, and irrational gamblers themselves. If casinos prey on the weak, then when governments impose “punitive” taxes on casinos they are ultimately skimming the profits of an injustice rather than addressing it. Again, we — through the agency of our government — become the casinos’ accomplices in wrongdoing.

Second, if what casinos are doing is immoral, then we ought not to be encouraging the building of new ones. By advocating for new casinos, we are advocating for more vice and making ourselves complicit in the immorality of the gambling industry. We further implicate ourselves by offering tax breaks and incentives to casino developers. Far from being high-minded in our taxing of evildoers to create public good, we are creating and encouraging public ill and then spending some of the ill-gotten gains on public works to expiate our sins, so that we may continue to sin. Actually, that view is too flattering, for we actually derive benefit from this expiation of our sins, which means it is no expiation at all, no matter how much we fool ourselves into believing we’re righting a wrong.

Third, again, I’m not sure the public has the right to profit from casino owners’ putative wrongdoing. If their actions create victims, then it is the victims that ought to be compensated. Who are the victims? Well, ex hypothesi they would be the poor gullible gamblers whom the casinos take advantage of. I do not gamble, and if I am not harmed by what casinos do, then what right have I to demand my cut of the “compensation” to spend on projects I happen to favour, such as subways? If I want subways, I ought to pay my own fair share for them rather than shaking down third parties to fund them for me, especially when those third parties are sick, weak, or mentally disadvantaged. If the activities of casinos cause harm to certain people, then those people ought to be compensated. I’m not sure why I would deserve compensation (barring, of course, certain vague and indirect negative spillover effects I may be said to suffer from the presence of casinos — but I highly doubt that an honest costing of these would be enough to fund subways).

3.    Gambling is an Inefficient Economic Activity

Maybe gamblers are not vicious. And maybe casinos aren’t either. Perhaps gamblers are not weak or stupid, but rather they knowingly and willingly gain satisfaction from engaging in self-destructive or plain wasteful activity. They make a choice, even though from the standpoint of economic efficiency it is a bad one. And maybe casinos don’t necessarily take advantage of them, but are simply helping them satisfy their reasoned preferences, and making effective use of the knowledge that there is a certain market created by the inefficient choices of gamblers. Maybe, just maybe, there is no immorality in gambling per se, but rather that it represents an economic problem. In other words, instead of being a moral issue, perhaps gambling is just an issue of misallocated resources that needs correcting through policy instruments like taxation.

Well, again, we run into the following problem: If the government aims to discourage gambling by taxing it, then it seems counter-productive to do so by positively encouraging the building of new casinos, complete with exciting new “entertainment complexes”.

In any case, leaving morality out of it, and viewing gambling as an economic problem of misallocated resources, I would argue that if we want a public good like new subways, we should tax the public (i.e. ourselves) in order to pay for them. Once that is done, if gamblers want to spend some of their remaining disposable income on slot machines or ponies, then let them. Once the subways are paid for through general taxation, that particular misallocation of resources has been rectified and the justification for taxing gamblers falls away.

Government Racketeering

We can roughly define “racketeering” as the sale of a solution to a problem that perpetuates the problem it claims to solve, thereby promoting continued recourse to the solution. The textbook example is the protection racket, whereby an organization terrorizes you (creating a problem) and then offers you its “solution” in the form of protection from the organization. Normally, if you have a problem, say cockroaches, you pay an exterminator, who hopefully eliminates the cockroaches; an actual problem has thereby been solved through the purchase of an actual solution. However, in a protection racket, the problem never goes away, because the problem and the solution are essentially the same thing.

Let us assume, as we have been all along, that gambling is a problem because it constitutes either a vice, a sickness, or a net social waste. The Revenue Argument is predicated on characterizing gambling this way, since that is the only plausible way to justify taxing gambling without it amounting to a blatant shakedown. The government’s “solution” to the problem is to build a shiny new casino to encourage gambling, and then to tax the gamblers it creates and/or provides with new opportunities to gamble.

Now that, ladies and gentlemen, is nothing more than racketeering. To put it another way, when the government builds casinos it is creating or expanding a “problem” (assuming it is one), by creating gamblers or expanding the opportunities of existing gamblers to gamble. It then profits from this by selling a “solution” to the social problem of gambling, by claiming to tax gamblers to supposedly discourage their behavior, which was encouraged by the government in the first place.

Furthermore, in this case the racketeer takes some of its winnings and pays off the public by spending some of that revenue on public goods like subways, in much the same way that criminal racketeers pay police officers to “look the other way”. When the racket becomes this systemic and this insidious, we call it corruption. More people now have a stake in making sure that a purported social ill continues. Once casinos are built, gambling will not be eliminated, because it has become counterproductive for the government to do so. If anything, it will be expanded.

If gambling is neither a vice nor a sickness nor an inefficiency, then gambling is simply the consumption of a product, much like any other product. It is then hard to see how it is legitimate for the government to discriminate against gamblers in its taxation policies. Gamblers should pay taxes, of course, but for the same reasons and in the same amount that the rest of us should.

On the other hand, if gambling is a vice or a sickness, then any scheme to purchase public goods from its proceeds amounts to nothing more than a racket. I fail to see how it is that racketeering is antisocial and criminal when engaged in by older Italian gentleman, while suddenly becoming a praiseworthy and public-minded endeavour when engaged in by the government (once it has used its monopoly of force to muscle out its Italian competitors).

The racket is not made legitimate by the fact that some of the proceeds are funneled to public works, for that only makes the public complicit in racketeering. If subways are truly a public good, then we all ought to pay our fair share of the taxes necessary to purchase them, gamblers and non-gamblers alike. I should add that as a city grows and its roads become more congested, subways become more of a public good, since even non-users benefit from the positive externality created by having fewer drivers on the road. Toronto has grown well beyond that point.


All of the arguments I have offered here against the claim that we should use gambling revenue to pay for public goods have been at bottom moral arguments, not economic ones. In part this is because I have an aversion to merely economic arguments that violate moral principles. I believe that economics and policy analysis are incomplete disciplines insofar as they fail to incorporate and be constrained by our moral values and principles. Of course, there’s room for manoeuver here, since those moral values and principles can themselves be contested. But economics and policy analysis cannot be value-free endeavours.

Maybe this privileging of morality is just mere prejudice on my part. It may very well be the case that it makes economic sense to use gambling revenue to pay for public goods, and if so, then who am I to stand in the way of progress and the “public good”? All I can say to this — besides questioning whether violating moral principles can truly be part of the public good — is that if you attempt to make this argument, then the onus is also on you to provide a further argument: You will have to convince me that not only does it make economic sense to use gambling revenue to pay for public goods, but also that there is no other way the same goal can be achieved without violating moral principles. If we are to violate morality, it must be because there is no other way. (And if there is no other way, then are we really violating morality?)

In any case, I am confident that the casino debate poses no such dilemma. If things like subways are truly public goods, then as long as we could be funding subways by imposing an equitable tax (or fee) on all users to pay for them there will always be an option that is less immoral than building more casinos. Casino mania only becomes a public policy option when politicians lack integrity, courage, and imagination.