The Hidden Costs of Winning the Lottery


Lotteries are a big business, raising billions every year for governments. But many people don’t understand how the games work. They think winning the lottery will help them build their savings, buy a new car, or pay off their debt. But what they don’t know is that most winners end up paying more in taxes than the jackpot amount itself. Here are some tips to help you make smarter choices about how and where you spend your lottery winnings.

Generally speaking, a lottery involves the drawing of numbers for a prize in exchange for a small stake. The prize amount is usually defined as a percentage of the total ticket sales. This percentage can be adjusted depending on the size of the ticket pool, as well as promotion and other expenses. The prize fund is typically guaranteed by the lottery organization, but not all tickets must be redeemed to receive it.

The first recorded lotteries occurred in the Low Countries during the 14th century, with towns using them to raise money for town walls and fortifications as well as for charity. In England, Queen Elizabeth I chartered the nation’s first lottery in 1567, stating that the profits would be used for the “repair of the Havens and strength of the Realm.” The tickets cost ten shillings each—a hefty sum back then, and a good portion of the prize value. In addition, the tickets also served as a get-out-of-jail card; the holder had immunity from arrest for all crimes except murder, treason, and piracy.

In early America, the lottery was, as Cohen puts it, “defined politically by an aversion to taxation.” Lotteries were an attractive alternative for raising revenue, and they were used to finance everything from church construction to civil defense to a war against the colonies’ former colonizers. Harvard, Yale, and Princeton were all financed partly by lotteries, and the Continental Congress attempted to use one to pay for the Revolutionary War.

Lottery advocates changed tack as the times did, and a popular strategy became to focus on a single line item in a state’s budget that was both highly visible and nonpartisan—usually education or veterans’ services, although public parks or elder care might be thrown into the mix. This approach made it much easier for legalization advocates to argue that a vote for the lottery was not a vote for gambling but for a particular government service.

But in the nineteen-seventies and eighties, as income inequality widened, job security and pensions began to disappear, health-care costs rose, and unemployment skyrocketed, the dream of instant riches was replaced by a nightmare. The lottery, with its hypnotic promise of the easy life, came to symbolize a national loss of faith in the old social contract’s long-standing promise that hard work and thrift could secure a decent standard of living for everyone. As a result, the lottery’s popularity boomed, and its profits soared too.

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