Gambling Taxes: Is Canada’s too high?

As we get to the end of summer, winter holidays are soon coming up. Many will be hitting the betting tables.

According to the World Health Organization, global gambling revenues total US$650 billion, with three-fifths coming from gambling addicts, who are an estimated 1.2 per cent of the population. Salivating over gambling revenues, governments tax the gross revenues (bets minus winnings) earned by gambling operators at rates ranging from three per cent to 83 per cent. The average tax rate among EU countries is 21 per cent, which is close to the rate in Ontario.

Some countries also collect sales taxes on gambling sales revenues, as our HST does. Or they may exempt online gambling from VAT, like the EU.

Gambling clearly has an ugly side: addiction and under-age betting. At a Munich conference I attended in April, Yale Professor of Psychiatry Marc Potenza showed some stark pictures of brain deterioration in gambling addicts. After interventions to curb addiction, however, the deterioration was reversed.

Potenza’s research centre reports that young people have a higher proclivity for gambling disorders since their brains are less developed. Many jurisdictions limit betting to people over the age of 18. To get around registration requirements for online betting, some parents help their children acquire player accounts, especially in sports betting. If their kids run up losses, parents are on the hook.

Like other “sin” taxes, taxes on gambling typically have two objectives: discourage harmful consumption and, of course, raise revenue to fund public services.

The revenue-raising objective contradicts the goal of discouraging gambling. If the government wants to suppress the consumption of a “sin” good, tax rates should be set so high that everyone stops consuming. Not all gambling leads to addiction, however, so economists often argue that consumption decisions should be left to individuals rather than “nanny” governments. If gambling disorders affect only a small part of the population, the focus should be on interventionist programs rather than prohibition via tax. Some countries like the U.K. earmark a small portion of gambling revenues to such programs.

The rapid growth of online betting that can lead to tax avoidance by joining international websites will put pressure on governments to reduce gambling tax rates. In recent years, some countries have decided to tax online gambling less than other betting forms such as casinos to counter tax avoidance. For example, Germany taxes online gambling at 5.3 per cent compared to casinos at 30 per cent. The U.K. taxes online gambling at 20 per cent and casinos up to 50 per cent.

Overall, our highly indebted governments are more concerned with raising revenue than using taxation to discourage a potentially addictive activity. However, by applying both HST and high taxes on gambling, Canadian governments in the future might find their tax base disappearing as it goes abroad.

A version of this article also appears in the Financial Post.

Financial Post – Jack Mintz: Are we taxing gambling too much?