Many bid to join the lottery each year and are continuously met with the same results. How do consumers benefit from the money they spend on the lottery?
Little do people who enter the lottery know, if you are the winner of $5,000 or more, prior to even seeing your winnings, 25% of your earnings will be removed from your check for federal taxes. Following that, depending on what you won and your salary, you’ll have to pay an additional 4.6% to complete the total 39.6% of the top income tax rate at the federal level. Those who enter the lottery disregard the above statistic because the marginal benefit of possibly winning the lottery outways the marginal cost of buying the entry ticket.
Though they’re a major source of government funds, lottery revenues are not as transparent as a normal tax. Consumers buy lottery tickets without acknowledging the implicit tax rate on the purchased tickets. Also, since states must spend their own money to manage and advertise lotteries, it’s common for them to pay private advertising companies high fees to assist in the sales of lottery tickets.
All in all, it is evident that lotteries circulate money through state and federal market systems.
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