The Taxation Of Gambling Machines: A Theoretical Perspective

Over the past decade, U.K. gambling sector has experienced several regulatory shocks that have led to considerable debate and controversy within the industry and policy-making communities. Although there is a well-established literature on the economic impact of the growth of gambling facilities on local and regional economies in the United States and the United Kingdom, relatively little research has focused on optimal taxation of gambling machines within these facilities. This chapter seeks to address this gap by examining the theoretical arguments for taxing gambling machines by means of a levy on machine takings rather than by means of a license fee levied per machine. Recent tax debates in the United Kingdom provide an ideal context for such a discussion.

A Primer on the Mathematics of Gambling

A mathematical analysis of gambling can explain why over time , one player wins and another loses. In the context of commercial gaming the “player” who wins is typically the house?the operators of the casino, racetrack, card room, or lottery. Simply put, commercial gaming enterprises generate a profit due to the mathematics behind the games. As many experienced gamblers have learned—for better or worse—and some knowledgeable insiders have voiced, “There is no such thing as luck; it is all mathematics.” This chapter presents the fundamental mathematics of gambling and shows how the math behind the games generates revenues and drives the economics of gambling.

The Modern Racing Landscape and The Racetrack Wagering Market: Components of Demand, Subsidies, and Efficiency

Gambling has become increasingly relied on and intertwined to provide financial support for the industry and beleaguered state governments. Technology has changed the way racetrack patrons bet, with the vast and increasing majority of total bets being made away from live racing. The menu of wagering options continues to grow, with a wide variety of exotic bets, futures wagering markets, program betting, and online betting venues becoming more prevalent. This chapter reviews the available research on the components of wagering demand, the effect of government subsidies on wagering volume, and the efficiency of the betting market. It also describes several new issues that continue to affect the racing landscape.

Information Efficiency in High-Frequency Betting Markets

The betting industry has been transformed by the Internet. Growth of person-to-person betting, mediated through online betting exchanges, has been a key element of this transformation. Betting exchanges enable traders to either back (buy) or lay (sell) bets on a wide range of sporting events. Such continuously operating online betting markets have ensured the transition of the use of high-frequency data (sub-daily sampling) from the financial setting into the betting market context. This chapter reviews recent academic research on the topic of information efficiency in high-frequency, in-play football betting markets. Several studies have reported evidence violating weak-form information efficiency, in the form of a favorite-longshot bias in in-play betting prices. However, there is evidence in the literature in favor of semi-strong form information efficiency. One study reports interesting evidence in support of strong-form information efficiency. As in-play betting markets continue to develop, driven by further improvements in computing power, parallel growth is anticipated in research on information transfer and price formation in financial markets, an exciting new arena for academic study.

Overview of the Economic and Social Impacts of Gambling in the United States

This chapter provides an overview of empirical research on the economic and social impacts of gambling. Issues examined include the effects of casino gambling on economic growth; the relationships among gambling industries and the implications of these relationships on net government tax revenue; the social costs of gambling; casinos and crime; casinos and political corruption; and problems with cost-benefit analysis applied to gambling.

How Does Implementation of a Smoking Ban Affect Gaming?

This chapter reviews the literature on gaming and the restriction of smoking and then examines data on the riverboat casino market in the Illinois portion of the St. Louis Metropolitan area. This market is then used as a case study to discuss the issues of a localized smoking ban where patrons have access to neighboring substitute establishments that are not subject to such restrictions.

The Economics of Casino Taxation

This chapter examines how governments in many nations and regions tax casino gambling and also considers the economic effects of that taxation. The first section analyzes the nature of casino gambling, along with the forms of taxation that governments apply to casino operations, including wagering taxes, admissions taxes, fees, and other taxes. Section 2 examines the economics of casino taxation, including market analysis of a casino game, efficiency effects of casino game taxation, equity impacts or the incidence of casino taxation, and optimal government tax policy regarding casinos. Section 3 provides a summary of the forms of taxation used around the world, highlighting major gambling locations, such as Las Vegas, Macau (Macao), and Singapore, among others.

What Explains The Existence of an Exchange Overround?

This chapter analyzes factors that may explain the existence and magnitude of starting price–based overrounds on Betfair, the leading and globally dominant person-to-person Internet betting site. Drawing on both finance and horse race betting literatures, several hypotheses are developed and tested, using data on 2,184 horse races in the United Kingdom between 2008 and 2010. Results are discussed and explanations offered for the findings, such as a positive relationship between grade of race and Betfair overround (the higher the grade, the higher the overround). More broadly, this research suggests that microstructure analysis of order-driven betting markets, such as Betfair, constitutes a fruitful line of enquiry for those interested in understanding market efficiency.

On The Long-Run Sustainability of Tote Betting Markets

For the past century, tote operators and horseracing bettors have enjoyed a mutually satisfying relationship. However, the past decade or so has seen periods of decline in tote (totalizator) betting, which many attribute to the (supposed) increasing population of well-informed and (hypothetically, in the extreme) so-called sophisticated players who are believed to be extracting disproportionate amounts from the pools such that other more “casual” players count their meager returns and stop playing. This chapter examines whether this hypothesis is valid, by considering the extreme case of many sophisticated players in the market. It also argues that, whatever factors could be contributing to periodic declines in tote betting, the damage to the markets if there existed a proliferation of expert bettors is minimal and could not (as is feared by many tote operators, governments, and players), by itself, be enough to seriously or irreparably damage pari-mutuel markets.

The Employment Impact of Casino Gambling in the U.S.

Casino gambling has become a popular economic development strategy. This chapter examines the impact of casinos on employment as determined by an econometric analysis of state-level data for eight industries. The results suggest that the opening of casinos leads to employment increases in the arts and entertainment, accommodations, and food and beverage industries. At the same time, it leads to decreases in employment in management and professional services, technology, and manufacturing. Also evident is the impact of demographic changes and computer technology. These findings suggest that the expansion of commercial gaming has a positive effect on regional employment in some sectors while having a negative effect in other sectors, especially in those states with competing gambling venues.