Taxes and the Lottery

Lotteries are an effective form of government revenue. They are marketed as painless taxes, and they do bring in a lot of money for state governments. But these revenues are not without costs.

The purchase of lottery tickets cannot be accounted for by decision models that use expected value maximization. Instead, more general utility functions based on things other than the winnings can explain the purchase.


The casting of lots to decide fates and distribute prizes has a long history. Lotteries have been popular in Europe since the 17th century, and the English word ‘lottery’ is derived from the Dutch word for “fate” or “lot.” The first state-owned lottery was established in the Netherlands in 1569.

Throughout the centuries, lotteries have been used to raise money for a wide variety of public uses, including helping the poor and financing projects in the American colonies. The Continental Congress even attempted to use a lottery to raise funds for the Revolutionary War.

Revenues typically spike immediately after a lottery’s introduction, but then plateau or decline. The result is that state officials are forced to innovate, and introduce new games to maintain or increase revenues.


There are many types of Lottery formats, each with its own peculiarities and advantages. Some are more modern and inclusive, such as lottery games that allow players to pick their own numbers or offer multiple add-on options. Other formats, such as Keno and Numbers games, are more traditional and rely on fixed payouts or pari mutuel system.

Scratch-off games are the bread and butter of lotteries, accounting for 60 to 65 percent of total sales. They are also very regressive, targeting poorer players. Despite their regressivity, these games have a strong appeal to people. It is a human impulse to gamble, and lotteries take advantage of this. They use advertising to stoke that fire, promoting the size of their jackpots. This gives the impression that winning the lottery is easy and safe.

Odds of winning

Unlike skill-based games like poker or blackjack, lottery odds are calculated purely by chance. Nevertheless, players can improve their chances of winning by picking random numbers and staying away from numbers that have already been drawn.

While these strategies may not increase the likelihood of winning, they will help you maximize your money. It is also important to know that if you win the lottery, you must pay taxes.

It’s no surprise that most people believe that winning the lottery is an extremely rare event. In fact, the chances of winning a single lottery ticket are 1 in 292.2 million. Moreover, most people who win the lottery squander their winnings and end up in debt. For this reason, it’s a good idea to avoid playing the lottery.

Taxes on winnings

The IRS considers lottery winnings taxable income, so you’ll need to pay taxes on any winnings you receive. The federal government requires lottery agencies to withhold 24% of winnings, but this may not be enough to cover what you’ll ultimately owe at tax time. The amount withheld is also based on whether the winnings are paid in one lump sum or in smaller annual payments.

The other big question is how the prize will be paid. You can choose to receive a lump sum payment or an annuity that pays out in small annual payments over many years or decades. Each choice has financial implications, so you should consult a CPA or financial planner before deciding. You should also consider the tax impacts if you join a lottery pool with friends or family members.


In the nineteen-sixties, growing awareness of money to be made in the gambling industry collided with a crisis in state budgets. Many states were struggling to maintain essential services without raising taxes or enraging their anti-tax electorate. So they turned to the lottery.

Lotteries are regulated by federal and state laws, and investigations of winning prizes can be surprisingly thorough. They can involve direct employees of the lottery operator, suppliers of equipment and advertisers who do business with them.

To keep ticket sales healthy, state lotteries pay out a substantial portion of the proceeds as prize payments. This reduces the percentage of revenue that is available for state spending. But it also obscures the true tax rate of lottery profits. Most consumers are not aware that they are paying a hidden tax when they buy tickets.