High taxes and gambling jackpots

Alex Rubner

In The Economics of Gambling I advised surtax-payers to let their chauffeurs queue at the post office to acquire the maximum number of Premium Bonds. This is even more pertinent after the Healey budget which has lifted the tax on the top slice of investment income to 98 per cent.

The pools promoters, like the employers of Ernie, dislike being described as gambling organisers. Hence the pools call their punters 'investors' and the rewards 'dividends', while Premium Bonds are officially classified as National Savings and the prizes as interest.

To draw an additional, annual, disposable income of £75,000 — the amount of the new top Premium Bond prize — some British citizens would have to buy £30 million (yes, thirty million pounds) of 12.5 per cent bonds which yield before-tax £33/4 million. No individual in this country has £270 million to invest, a sum which is needed to generate, post-tax, £681,000 — but Littlewoods have published the picture and name of a lady customer to whom they recently paid such a tax-free 'dividend'.

Prima facia evidence suggests that the overwhelming majority of the population have no idea of the astronomical income tax rates culminating in 98 per cent. It is safe to surmise that even if these were widely known, few would man the barricades to fight against them — most people would probably regard such high taxation as 'fair'. I am realistic about this public attitude, but am equally convinced that the likely reactions of those hit by the punitive tax rates will harm the very people who are not themselves subject to the 98 per cent rate but applaud its imposition on others.

Once owners of capital understand the package of inflation, • wealth tax and draconic taxes on investment income, many will find it more rewarding to spend their money than to invest it. Sales of yachts, diamonds and Bahama holidays will surely boom. This adverse impact on savings must not be confused with the disin centive effect of income tax on salaries and wages. Paradoxically, this is most pronounced in the lower-income brackets; PAYE deductions of one third of extra earnings are proving a strong de terrent to overtime by some manual workers. In the higher echelons, however, even a 100 per • cent marginal income tax would not necessarily produce immediate, catastrophic, results.

The Permanent Secretary to the Treasury and the chairman of ICI would no doubt grumble if any increases in their emoluments were confiscated by the Revenue, but — because of their putative job satisfactions — they would continue at work with the same efficiency and dedication.

Leaving out moral considerations and the fiscal aspects, • gambling can often be fun and entertaining. Yet it is a sad com mentary on our society that the Chancellor — seemingly without any connection — can announce in the same budget speech increases in direct taxes and in Premium Bond prizes. This new ethos has two facets: it is iniquitous to be rewarded handsomely for the sacrifice of delayed consumption and the wise investment of personal savings. To attain personal command over a large sum of capital is not wicked provided it flows from a successful flutter.

Because of its unpalatable character too little public attention has been given to the way in which gambling has become an) important part of government finance. This Treasury edifice rests on three pillars:

1. Whitehall considers that at any given point of time there is a fixed volume of stake money that British punters are prepared to 'invest'. By allowing new ventures to come into the market, the

, turnover of the existing

gambling organisations is likely to be reduced. Hence the Treasury will fight tooth and nail to prevent local authorities and charities from establishing lotteries (which offer high prizes), because the effect is predicted to be a fall in the tax revenue that accrues to the coffers of the central government.

2. The betting and gaming taxes — those on the pools have recently

been increased — are scheduled

,to raise £235 million this financial year. If some Treasury optimists

are right then an almost equally large amount may come from the sale of Premium Bonds. By the spring of the next year the Government may be holding more than £1,250 million of Premium Bond money at a cost of only 5.5 per cent. If the present advertising campaign lures enough people to covet the tax-free £75,000 prize, there may even be a switch out of the traditional National Savings media into Premium Bonds.

3. Comparative studies of lotteries have established that the higher the top prizes the greater the response of the gambling public. So far as the tax-gatherers are concerned, the higher the prizes or other gambling rewards the greater their opportunity to collect a proportionately large tax on the turnover (or in the case of Premium Bonds the lower is the interest servicing cost which need be entailed to finance the prizes).

But the British fiscal technicians have come up against the belief of many politicians that "the larger the number of small prizes the more democratic is the gambling venture." Harold Macmillan faced in addition a moral dilemma. When he introduced Premium Bonds in 1956 — surely the one thing for which his term as Chancellor will be remembered — he had to fight off not only the political opposition of the Liberal and Labour Parties but also the ferocious attack of the churches led by the then Archbishop of Canterbury. On the dubious principle that if gambling is sinful, at least the prospect of only a small prize makes it merely a small sin, Macmillan fixed the top prize at the derisory amount of £1,000.

The football pool promoters have just suffered a swingeing rise in the turnover tax on their punters' stakes. They did not scream because, as good businessmen, they have long ago recognised that high turnover taxes are a lesser evil when compared with restrictions on the size, or tax-free nature, of the 'dividends'. Already in 1951 the government accepted Treasury advice to reject a Royal Commission's recommendation to limit 'dividends' to a maximum of £20,000.

In 1973 a committee appointed by the Home Office published the suggestion that the highest payout by the pools be set at £100,000. It is a fair assumption that when the present budget was prepared, it was explained to the new Chancellor that the revenue from gambling taxes might fall if this recommendation were implemented. The same fiscal logic also prevailed with Premium Bonds. It has been decided to cut down on the number of £25 prizes and to utilise the augmented interest allocation of the Treasury -for larger prizes. The saga started with a £1,000 prize. Step by step it was raised to the present £75,000 peak, but future Chancellors may seek to conquer even loftier heights.

Dr Rubner's most recent book is Three Sacred Cows of Economics (McGibbon and Kee)