Welcome Guest
Log In | Register )
You last visited December 3, 2016, 6:52 pm
All times shown are
Eastern Time (GMT-5:00)

Newspaper takes a hard look at the N.J. Lottery

Topic closed. 36 replies. Last post 11 years ago by antiwarlover.

Page 3 of 3
PrintE-mailLink
Avatar
Urbandale, IA
United States
Member #8624
November 11, 2004
115 Posts
Offline
Posted: December 6, 2005, 6:14 pm - IP Logged

Well, I can't agree that the lottery is a tax - even as a semantic twist.  To argue that all taxes are voluntary since you don't have to work, buy things, or own anything is a little absurd.  A tax is an involuntary assessment placed on some thing of value - specifically not something that is sold by the government.  The portion of the dollar that the state lottery keeps is called "profit".  Lotteries are indeed pretty unique in that it is a product sold by the government, but it is much more in the nature of profit rather than tax.

I disagree that the lump sum is a ripoff.  The lottery can invest the entire cash amount.  The winner first pays income taxes (Federal and State) which can go well over 40%, and then has the rest to invest.  The cash winner starts with about half the money to invest and will have to do pretty well to beat the lottery's earnings.  It is possible for the winner to set up an annuity stream that equals what the lottery can earn in interest and pay out, but the winner will have to accept quite a bit of risk. 

You do identify a problem with estate taxes.  The feds want to tax the present value of the estate - even if it includes future payments.  That can devastate an estate with penalties and interest on money that they don't yet have.  For this reason, Powerball will cash out an annuity stream at the request of an estate.  When the winner dies the estate can take the remaining cash, pay the estate taxes, and distribute the rest - to relatives who then pay state inheritence tax, then buy something and pay sales tax (well, you get the idea).

 

    Avatar

    United States
    Member #27625
    December 4, 2005
    88 Posts
    Offline
    Posted: December 6, 2005, 8:45 pm - IP Logged

    To Chuck 32 from Demonter:

    The State's percentage is their profit; in the gambling world they refer to the bookmaker's percentage as the "vigorish". Raven considers the fact the a government is taking a profit out of the play it is a "TAX". According to Webster's Dictionary a tax is an imposed levy...the State's percentage is an imposed levy, therefore Raven refers to it as a TAX. That I call a "semantic twist" since it has the one essential ingredient common to all taxes-the fact that they are imposed by the State...you disagree, I understand because it's not literally a tax as such. I did preface my analysis with the fact that it's a "semantic twist". People toss words and concepts around without a complete objective analysis at times. Enough said.

    In addition, who claims that the lump sum is a ripoff? My statement was that the annuity is a bad deal considering the time value of money-inflation and the scandalous IRS treatment if a winner drops dead prematurely. As I see it Chuck 32 we are in agreement on the essential facts.

      Avatar
      Urbandale, IA
      United States
      Member #8624
      November 11, 2004
      115 Posts
      Offline
      Posted: December 6, 2005, 9:51 pm - IP Logged

      Yeah, I don't think that we disagree on much.  I did mean to refer to you saying that the annuity was the ripoff, not the lump sum.  I type faster than I think.  The time value of money only means that a dollar today is equal to more dollars tomorrow due to the interest-earning capability of the cash.  The lottery does invest the money, of course, and does payout more dollars in the annuity.  The annuity is only a bad deal if you can do better with the investments.  For most people, the annuity is actually the best option.  With a cash amount of say $100 million, the lottery gets to invest $100 million while the cash winner pays taxes and then has maybe $55 million or so to invest (depending on the state tax rate).  It takes quite an investment to catch up to the lottery annuity stream - and don't forget that the lottery stream is guaranteed. 

      The best option, of course, would be to let the winner choose their own combination of cash and some term of annuity option.  May 20% paid immediately and 80% paid out in a graduated annuity for as long as you expect to live.  Sadly, the IRS won't quite allow that much choice yet.  They only waived the constructive receipt rule several years ago to let winners make their choice after the win.

      I will say that Raven's arguement that it is a tax is about the best I've heard so far.

        Avatar

        United States
        Member #27625
        December 4, 2005
        88 Posts
        Offline
        Posted: December 6, 2005, 10:25 pm - IP Logged

        To Chuck 32 from Demonter Re: Annuity

        What's the half-life of the annuity value factoring in inflation? We sometimes forget that we would be getting paid in cheaper dollars every year...the half life of the purchasing power being 14-15 years into the cash flow stream. What would a buck be worth in the last few years of a 30 year annuity? Annuities are better during the first decade than during the last. The inflation risk is the biggest risk in accepting a long term payout...who knows what the value of a buck will be? Less, that is for certain. What will the cost of an average house be in 25-30 years? Or a typical automobile? Most savvy folks (accountants, investors) I've asked this question to advised that they would recommend taking the cash lump sum and invest it in real estate, blue chip stocks etc. A bird in the hand is worth two in the bush...

          Avatar
          Urbandale, IA
          United States
          Member #8624
          November 11, 2004
          115 Posts
          Offline
          Posted: December 6, 2005, 11:47 pm - IP Logged

          To Demonter from Chuck32 Re: Annuity

          We do disagree on something after all .  Of course the financial experts say to take the cash - they get to invest it and make some of their own cash.  Actually, I have talked to dozens of experts, though usually those who write columns for newspapers giving financial advice.  After they realize how the annuity is paid out (some thought it was just saved until the end of the term) and once they realize that the winner pays out nearly half of the cash amount in taxes right away, they do change their minds - well, a few did still want to take the risk.  There have also been two finance professors who have written papers on how strange it is that people take the cash when they can get a guarateed investment that starts out by investing twice the money.  You have $50 million to invest and I have $100 million to invest.  Let's see who can make more interest.  Ready, set, go!

          Inflation is a risk for any future money stream but it is not a factor here. The problem of inflation is exactly the same risk for a cash winner who invests (half) the lump sum on his own.  His earned dollars will be worth less too.  It is true that a lottery prize should not be an equal annual payment.  $1 million in year one is not the same as $1 million in year 15.  The Powerball game has gone to a graduated annuity stream; raising each year's payment by 4% over the previous year, as a hedge against inflation.  That is really want a winner who chooses the annuity wants - to forget about having to worry about investing and losing the money.

          The annuity is the bird in the hand.  The annuity winner has that guarantteed income stream (and with Powerball a graduated annuity stream that keeps up with inflation).  The chance of earning more against the risk of losing it all, is the two birds in the bush.  The annuity is certainly not always the best choice for everyone, but it is likely the best choice for most winners.  Too bad that is so quickly dismissed without thinking about it.  If you do run into one of those savvy investors again, remind them about the income tax hit on the cash amount and how the lottery can invest the cash amount BEFORE taxes.  Let them run the numbers.  They can certainly find some hot new stock that can catch up to the lottery annuity (or might lose it), but it is hard to beat a guaranteed graduated annuity that starts off with twice the cash to invest.

            Avatar

            United States
            Member #27625
            December 4, 2005
            88 Posts
            Offline
            Posted: December 7, 2005, 6:12 am - IP Logged

             REPLY TO CHUCK 32 FROM DEMONTER

            CHUCK YOU SEEM TO BE CONFUSED REGARDING THE RELATIONSHIP BETWEEN THE GROSS AMOUNT OF THE ANNUITY VS. THE CASH LUMP SUM.

            CHECK ANY LOTTERY FAQ SECTION REGARDING THE SETTLEMNT OPTIONS

              Avatar
              New Member
              silver spring,md
              United States
              Member #14383
              April 25, 2005
              5 Posts
              Offline
              Posted: December 26, 2005, 11:04 pm - IP Logged

              now is the time for lotteries to SERIOUSLY REDUCE SPENDING. NOW IS THE TIME TO PUT MONEY IN THE POCKETS OF THE POOR BEFORE THEY TOTALLY STOP PLAYING. IT IS SORT OF LIKE EATING FOOD WITH NO FIBRE,AFTER AWHILE PEOPLE WILL GET WISE AND START EATING HIGH FIBRE FOODS-- LEAVING POTATO CHIPS (LOTTERIES) in the

               dust.