Why the Treasury’s appetite for betting taxes is no solution to gambling problem

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By gatuyu t.j

Drawing parallels between financial markets investing and gambling is an analogy disliked in the world of finance. Yet, at a basic level, gambling and investing are identical activities, both involving wagering an outcome in an environment of uncertainty.

Speculator investors buy stock for the same reasons that gamblers bet on a certain football teams to win or choose lottery numbers. Both have same illusions. Whereas in financial markets the goal is to beat the market, in gambling the goal is to beat the odds.

Notably, investing in instruments such as derivative markets has the same potential for negative externalities as gambling, yet it has been accepted and even embraced as the newest way for investors to act either rationally or irrationally in the capital markets.

With these similarities, why does society view investing and gambling differently?

Regulators characterise investing as an enterprise of skill in which those who are diligent may earn deserved rewards, while gambling is an enterprise of chance that encourages lazy and untalented people to divert useful capital with undeserving few reaping ill-gotten gains foolishly lost by vast majority. This divergence is paternalistic, more triggered by classes of people participating and profiting in these activities.

Henry Rotich, the Treasury Cabinet Secretary, has in almost every budget speech lamented at how betting has created negative social effects to the young and vulnerable, before imposing, often hurried and haphazard, tax measures. There has been an observable heightened frenzy to control betting industry through tax measures. This is visibly creating a hostile environment for the sector’s operations.

The proposed excise duty adds to the heavy tax burden in the sector. This includes a 15 per cent betting tax levied on gross gaming revenue, 30 per cent corporation tax on profits, and 20 per cent withholding tax deducted winnings.

There are some notable anomalies with these tax measures. Betting is a form of entertainment. Levying entertainment taxes is a mandate of the county governments. Were counties to enact laws to impose entertainment taxes from betting revenue, it would add to this taxation burden.

Arguably, the betting tax currently levied by the national government, save perhaps for online betting activities, is unsupported constitutionally.

Again, subjecting the gross winnings of a player to 20 per cent withholding tax is inconsistent with best tax practice, for it creates a higher tax burden for the players. This withholding tax ought to be levied on net proceeds, after amount staked is deducted from winnings.

For tax accounting, the amount staked should be deemed to have been wholly and exclusively used for the production of this taxable income and deducted.

Further, charging betting tax on gross gaming revenue and later levying corporation tax is unjust and double taxation. Gross gaming revenue is equivalent of “sales”, not “profit”.

Corporation tax is levied on taxable profit in the company’s accounting year after expenses are deducted. As earlier argued, if betting tax has to be levied, it is the county governments that ought to charge it under the heading of entertainment tax.

Lastly, the proposed excise duty on amount staked is what is known as the Pigouvian tax. The purpose of a Pigouvian taxes is to force private markets to internalise the social cost of an activity and reduce negative externalities. It has been effective in areas such as reducing environmental pollution or controlling certain harmful consumptions.

For Pigouvian taxes to be effective in the gambling industry, there is need to appreciate the two consumer types. These are the price-sensitive recreation gamblers and price-insensitive problem gamblers.

Generally, consumption levels of recreational gamblers are disproportionately reduced by increase in cost while problem gamblers are to a bigger extent cost-insensitive. The consequence is recreation gamblers may exit the leisure and leave problem gamblers to fund the tax, bringing about inequity of incidence.

Since problem gambling triggers negative externalities, Pigouvian taxes should be applied for forms of gambling popular with problem gamblers.

Applying it across board will not achieve optimal results because negative externalities are not uniformly spread. Hence, the proposed excise duty will be a blunt tool as a Pigouvian tax.

The trend of taxing betting firms in Kenya betrays that these high, duplicating taxes are more of intention to capture economic rents than maximise economic welfare.

However, even without benefit of econometric model, the multiple taxes in Kenya’s betting sector have possibly reached the peak of the Laffer curve. A Laffer curve illustrates that revenue will increase with rate of taxation until a certain point, where further increase in tax rate will lead to drop in revenue collected.

The Treasury should therefore be sincere and drop the pretence that it is using taxation as deterrence on gambling. Such admission will enable it to create a fair tax regime with features of allocative and distributional efficiency. This will probably enable betting firms to create shared values with their customers and promote industrial competitiveness, hence enhanced revenue.

Equally, any betting tax policy initiative should not be made in a domestic vacuum. As we learn from game theory, it has to grasp possible moves of betting players relocating to offshore jurisdictions if there are significant tax savings of doing so.

This essay was first published in the Business Daily. Available Here

 The Author is the Managing Editor of the Gatuyuriana Journal

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