I understand that Americans need to pay income tax in order to pay for the federal government, federal courts, armed services etc. We can argue about whether the federal government is too big, the rich should pay more, or whether the poor should pay anything, but I am comfortable with the overall concept. My problem is with capital gains and lottery winnings.
Let’s say I work hard and earn $1,200. I pay income tax on that money and net $1,000 (forget the other taxes etc.). So far so good. Then I decide **not **to spend the $1,000 on food, shelter or something for me, but instead buy some stock. I leave that money for 10 years, but then decide I need it to buy a car. My $1,000 has appreciated to $2,500 for a net gain of $1,500. The government then taxes me for the appreciated amount I earned based on a decision I made 10 years ago. Is it just me, or do others think it’s odd that the government gets to profit from my smart investment? Even if it’s only 10 or 20%, should the government be able to keep their hands in my pocket? Why?
What about lottery winnings? If my $1 lottery ticket wins $1M why does the government get to grab 40 to 50% of it? Should the government benefit from my good fortune? Why?
::Head banging on the desk:: Short answer: “that’s where the money is.”
Long answer: “Government of the people, by the people, for the people” – the government is not some external boogey man out to steal your hard-earned cash and give it to strangers and other worthless layabouts. The government is YOUR agency for accomplishing things that you can’t pay for yourself and can’t personally convince your neighbors to pay for, and your community’s collective mechanism for deciding what to pay for (so that you, possibly a known crank, can’t invest an entire community’s wealth in stockpiling graham crackers). The government does not “benefit” from anything: YOU do, your neighbors do, and various people you don’t know do – if you object to people you don’t know participating in your community, go live on an island.
As for why it’s a good idea to tax capital gains and gambling winnings – hell, why should YOU profit from these things? Why do you regard the operation of financial markets and the like as part of the natural order, but the government that resolves disputes, maintains order, punishes crime – in short, that makes it possible for ordinary shlubs like you and me to participate in those markets with any degree of confidence – is external, and needs to keep its mitts off “your” money?
In the natural order of things, there would be no stock market and no lottery, and you would never imagine a car; you would have nothing except what you can make with your own hands. There might be a big man who lets you live if you give him the fruits of your labor. Collective action is what lets us have the great wealth, and engineered goods, and a government more sophisticated than thuggery. They go hand in hand, they enable and finance each other, and there’s no reason not to, and every reason to spread the pain evenly by taking more money from “them as gots it.”
It isn’t clear to me why the government benefiting from your good fortune would seem worse to you than the government benefiting from your hard work. As a general rule the government taxes any income that you make: it isn’t clear to me why it would be worse to tax a certain part of it depending on whether it was a salary, a winning, or a good investment.
I think we need to turn this around: what is your rationale for believing that good luck is less taxable than hard work?
The government taxes “economic gain.” Did you get economic gain from lottery winnings or your capital investment? Then, in most circumstances, its taxable. That’s the basis of U.S. tax philosophy. (There are other systems, like taxing property - which we do in property tax and license tabs - but we don’t have a wealth tax. Or sales tax. Or value added tax. But the basis of the federal tax system is to tax economic gain.
Taxation of income is taxation of income. The problem lies in looking at lottery winnings or capital gains as anything other than income.
When you earn a capital gain it is off of a capital investment you have made. That’s actually no different than the paycheck you receive. You make an investment of your time and labor and are compensated at a pre-arranged rate. While true, capital gains are different in that your capital has a non-zero chance of being lost due to poor investment, it’s still just income when you earn money from it. It’s only because of political concerns capital gains is taxed at a special rate in any case.
There are mechanisms to alter the manner in which your investment income is taxed, though. If you make contributions to a Roth IRA, when you retire (or reach age 59.5) you can withdraw them and you pay no tax on the money you take out at that point. However, the contributions are not tax deductible and do not reduce your AGI, so if you’re putting $5,000 a year in a Roth IRA you will pay more taxes each year while you’re working than you would pay if you were putting the money in an employee deferred compensation plan or normal IRA.
When Michigan first started the lottery, winning were tax free. They quickly changed it because the winners probably felt so good about winning that they would not notice it and the government likes money.
Let me join the chorus who think that your idea (taxing hard-earned wages is right and proper, but taxing lottery winnings is not) seems bizarre. Are you sure you’re not a right-winger?
I’m not a right wing crank… really, I just have a different view of “gain” than most people do I guess. I was watching a reality TV show (Gold Rush Alaska) and started thinking about whether the gold they found would be taxable when it was sold, and if so, why?
Case #1. I’m walking along and see a shiny metal object sticking out of the ground on my property. I walk over and pull out a gold nugget worth $10,000. I can keep it in my safe forever and my “gain” is never taxed. Correct? If I instead decide to sell it I would legally have to declare the money I get as a capital gain and the government, or society if you will, gets 20% of it. I get to keep 80%, not a bad deal for me. It just seems strange that everyone around me benefits from my good fortune, unless I just keep it and never sell it. If you found a gold nugget, or won money at a casino, or won the lottery I wouldn’t expect to benefit from your good fortune.
Case #2. I buy a piece of land and build a house on it. I move into the house, get married, and after 10 years it has appreciated $500,000 more than it cost me to build it. I sell the house, pocket the money and pay no capital gains whatsoever. That doesn’t seem consistent with society sharing from my gain, does it? BTW I actually did this once and was thinking about doing it again when the housing market tanked in 2008.
I suppose the sale of a house exemption is to encourage people to buy houses and then hope they appreciate, but why don’t we want to encourage people to gamble and play the lottery?
If lottery winnings are taxable income, then spending money on lottery tickets should be a deduction from taxable income. If I spend $10 a week on lottery tickets every week, winning no prizes until week 52, when I win a $500 prize, then I’ve made a net loss of $20 on the lottery. It’s crazy for the government to tax me as if I’ve made a $500 income from the lottery.
They are, to the extent of your winnings. Gambling losses are treated the same. So if you spend $400 on lottery tickets and win $500, you are only taxed on $100. However, if you spend $600 on lottery tickets and win, $500. You pay no tax, but you don’t get to deduct the additional $100.
If every year I spent $100 on lottery tickets. I know the odds are against me so it will take time. After ten years I WIN $1000. I spent $1000 on tickets and won $1000 on tickets so I am even. But I can only write off $100 of what I spent. this is where I go uuhh?
Ordinary people use cash basis accounting - you don’t get to accrue. So its cash in, cash out, each year. There are a few exceptions - you do get to write off capital gains losses for longer - so if you are going to gamble, the stock market has advantages over lottery tickets.
Income taxes focus on your yearly income and expenses, not your income and expenses over ten years. If you spend the money, it’s deductible that year; that’s the only sane way to keep track.
Yes it is. Gambling pays for a lot of people’s salaries and is a multi billion dollar business in the US. Since it’s legal in some places, as opposed to selling drugs which isn’t legal anywhere, I don’t see why society would create rules to discourage it. If society wants to outlaw gambling it can pass federal laws to do that.
And the lottery, for better or worse, pays for a lot of the money that states pump into schools. Certainly society benefits from there being a lottery.
Society treats gambling as a vice, much like smoking and alcohol, but doesn’t want to make it illegal.
I don’t think that the tax treatment of gambling winnings vs. home sale exemption, qualifies as “discouraging” a behavior vs. “encouraging” another. Gambling isn’t discouraged, it’s just not encouraged, like home flipping. Not saying that’s right our wrong.
Last time I checked, smoking and alcohol weren’t illegal either, but they are not encouraged activities from a government perspective.
Steve Wynn, owner of the Wynn casinos in Vegas, said in an interview that the only people that win in gambling are the casino owners. The odds are in their favor. Gambling by individuals should view it as entertainment.
I think it’s all in how governments rationalize what they tax and what they don’t tax. Here in Canada, for example, lottery winnings, and other gambling winnings, are not taxed. The government’s rationale is that people should pay tax on income they planned: employment earnings, investments in securities or land, and so on. Gambling winnings, however, are seen as an unexpected windfall to someone who doesn’t make their living gambling, who decided to play a chance; and it wouldn’t be right to tax those winnings. Of course, a professional gambler is taxed on winnings, as he or she does plan to obtain income this way. I suppose it could be argued that nobody buys a lottery ticket or plays a slot machine planning to do anything but win money (even if they know the odds of winning are against them), but there is no guarantee that the casual player will end up profiting, as the person would with a job or carefully-researched and planned investments. Gambling winnings are surprises, essentially.
I’m simplifying things a lot, but that’s the basic gist of it. Mind, our federal and provincial governments have a lot of other taxes, and rationales for those taxes, that simply wouldn’t make sense to the US federal and state governments; or, for that matter, the American people. In the end, it would seem that what a government wants to tax, it will; based on a reason that may or may not make sense to the taxpayer.
