Australia's Future Tax System

Final Report: Detailed Analysis

Chapter E: Enhancing social and market outcomes

E7. Gambling taxation

E7–1 The rationale for gambling taxes

Principles

Government restrictions on the supply of gambling services, implemented through licensing regimes, mean that some gambling businesses earn economic rent. Economic rent is an efficient tax base and should generally be appropriated by the government, through either licence fees or taxation on player loss or turnover.

Taxes can only help problem gamblers counteract their self-control problems if they understand the price they face (the odds) and respond to higher prices by reducing their losses.

Governments that rely on gambling revenue to a significant extent may have to make difficult choices in balancing revenue-raising with regulating gambling to limit problem gambling. The regulatory role should be separated from the collection of revenue.

Regulation and economic rent

Gambling is an activity widely enjoyed in Australia. Eighty per cent of Australian adults engage in some form of gambling (Productivity Commission 1999b). Around 15 per cent of adults gamble regularly, excluding lotteries and scratchies (Productivity Commission 2009a).

Because gambling allocates financial benefits in accordance with uncertain processes, which sometimes allow the gambler to gain a positive return, it has some features in common with investment in a risky asset. For a small number of professional gamblers, gambling functions as an investment that is expected to yield a positive return. For most recreational gamblers, however, spending on gambling is simply consumption spending, comparable to spending on any other leisure activity. A small minority of gamblers experience self-control problems that lead to excessive losses. For these people, gambling is an addictive pursuit.

Despite high participation rates, popular attitudes to gambling are ambivalent. A large proportion of the population regards gambling as a serious social problem and supports more stringent restrictions on the supply of gambling services (Centre for Gambling Research 2004). A common government response has been to place restrictions on the number and size of gambling establishments, their hours of opening, the facilities they offer or the design of games.

As a result of State government restrictions on the supply of gambling services in Australia, the holders of the limited number of licences are able to make more profit than they would in a competitive market — that is, they earn economic rent. Economic rent is an efficient taxation base (see Section C1 Charging for non-renewable resources and Section C2 Land tax and conveyance stamp duty).

In theory the government could appropriate 100 per cent of the economic rent without changing the amount of gambling services that companies would be willing to supply or the price to consumers. This is because — even if all the rent were taxed away — companies would still make normal profits; that is, they would receive enough gambling revenue to cover their costs and offer investors an adequate rate of return on their investment (see Box E7–1).

The government can capture the economic rent through taxation or through auctioning licenses to gambling providers. The price of a licence would generally reflect the economic rent that bidders expect to be able to earn from the gambling business.

If licences could be bought and sold, their scarcity and any taxes payable would be reflected in their market price. Taxes may be imposed up to the point where the market value of a licence falls to zero, that is where taxes consume all expected economic rent. At that point, the investors would still supply capital, but the gambling business would not be prepared to pay for a licence to provide gambling services.

Problem gambling

Consumers will usually make choices about what to consume that provide them with the greatest available satisfaction, without the need for government intervention. A large majority of people who gamble derive satisfaction from it without harming themselves or others.

This principle is not, however, applicable to all consumers. Minors and people with intellectual disabilities, mental illnesses or severe addictions are not always able to make choices that provide them with the greatest possible satisfaction, especially over a long period rather than at a single point in time. In its most recent report on gambling, the Productivity Commission estimates that between 0.5 and 1.0 per cent of adults suffer significant problems from their gambling each year. It estimates that a further 1.4 to 2.1 per cent of adults are subject to moderate risks that may make them vulnerable to problem gambling (Productivity Commission 2009a).

Problem gambling is characterised by chasing losses, spending more money on gambling than intended, failing in attempts to stop gambling, losing time at work or study, accumulating large debts, liquidating assets or misappropriating money (Productivity Commission 1999b).

Problem gamblers can also suffer a wide range of adverse health effects, including depression, stress, anxiety, lethargy, insomnia, poor nutrition, suicidal thoughts, increased caffeine and nicotine consumption, sweats, confusion, panic and ulcers (Amies 1999). There may also be less definable personal costs arising from loss of self-control and the breakdown of family and other relationships. Problem gamblers who commit crimes to finance their gambling impose costs on the victims and may also incur the costs of punishment.

The self-control problems of problem gamblers are associated with 'time-inconsistent preferences' under which a person gives more weight to immediate costs and benefits than costs and benefits in the future (see Section E6 Tobacco taxation). One consequence is that a problem gambler may realise that it is in their long term interest to stop gambling and make plans to do so at a particular time, but find themselves unwilling to carry out their plan when the time to stop arrives. Episodes of problem gambling may also be triggered by environmental cues related to past gambling experiences — for example, if the person is exposed to a place, social situation or experience that is strongly associated with past gambling episodes (Bernheim & Rangel 2004).

In some cases, taxes may help addicted consumers overcome their self-control problems, but only if they understand and respond to the price they face. Other interventions may be more effective, particularly where environmental cues play an important role in triggering episodes of addictive behaviour.

In considering the use of taxation to address problem gambling it is important to remember that taxes on gambling impose costs on all gamblers, including the large majority who are responsible gamblers.