Rolling Jubilee is a better idea than the lottery
Yesterday there was a reporter from CBS Morning News looking around for a quirky fun statistician or mathematician to talk about the Powerball lottery, which is worth more than $500 million right now. I thought about doing it and accumulated some cute facts I might want to say on air:
- It costs $2 to play.
- If you took away the grand prize, a ticket is worth 36 cents in expectation (there are 9 ways to win with prizes ranging from $4 to $1 million).
- The chance of winning grand prize is one in about 175,000,000.
- So when the prize goes over $175 million, that’s worth $1 in expectation.
- So if the prize is twice that, at $350 million, that’s worth $2 in expectation.
- Right now the prize is $500 million, so the tickets are worth more than $2 in expectation.
- Even so, the chances of being hit by lightening in a given year is something like 1,000,000, so 175 times more likely than winning the lottery
In general, the expected payoff for playing the lottery is well below the price. And keep in mind that if you win, almost half goes to taxes. I am super busy trying to write, so I ended up helping find someone else for the interview: Jared Lander. I hope he has fun.
If you look a bit further into the lottery system, you’ll find some questionable information. For example, lotteries are super regressive: poor people spend more money than rich people on lotteries, and way more if you think of it as a percentage of their income.
One thing that didn’t occur to me yesterday but would have been nice to try, and came to me via my friend Aaron, is to suggest that instead of “investing” their $2 in a lottery, people might consider investing it in the Rolling Jubilee. Here are some reasons:
- The payoff is larger than the investment by construction. You never pay more than $1 for $1 of debt.
- It’s similar to the lottery in that people are anonymously chosen and their debts are removed.
- The taxes on the benefits are nonexistent, at least as we understand the taxcode, because it’s a gift.
It would be interesting to see how the mindset would change if people were spending money to anonymously remove debt from each other rather than to win a jackpot. Not as flashy, perhaps, but maybe more stimulative to the economy. Note: an estimated $50 billion was spent on lotteries in 2010. That’s a lot of debt.
mathbabe 
The current jackpot is advertised as $500 million, but its present value is actually $327 million (as it says on the website). Take taxes out, and your $2 ticket is worth way less than $2. (This is compounded by the possibility of sharing the jackpot, etc. Skip and I worked this all out in our paper.)
I seriously think Rolling Jubilee should try to compete for some of that $50 billion.
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That’s a really good point: if you tax-effect the E(x) calculation it’s a lot worse. The other side of that coin needs to be examined: the $2 you pay is *not* a deductible expense (unless you’re a professional gambler, which it turns out is really hard to get the IRS to agree with).
What’s the “payout” to the “ticket buyer” for the RJ? Remember that the lottery “works” because of psychology, not mathematics (optimism bias).
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How would one become a candidate for anonymous selection for the strike debt operation?
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I could be wrong, but my understanding is that you are a candidate if you have debt that is going to collection, i.e. that the creditor is writing off as a loss and is willing to sell for cheap. That’s what RJ is buying. But your debt is all bundled up with other people’s debts, so they don’t know ahead of time whose debt they’re buying. The “winners” are random — just like the lottery!
The biggest difference: the lottery returns a fraction of its income as winnings. RJ returns about 20 times its income as cancelled debt. (Ok, and also no one gets obscenely rich.) That $50 billion that people used to buy lottery tickets could absolve all student debt in the country. All of it. (If you believe the RJ estimate of a trillion dollars, that is.) Of course not all of that debt is bad.
To me the point is that if the brilliant idea of RJ really takes off, then the debt problem could actually become tractable.
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Gifts are taxable because they are income. Rolling Jubilee expects to get around that because by forgiving the debt, and thereby not collecting any income from it, no forms go to the IRS identifying the beneficiaries. It will be up to the former debtors to report their forgiven debt to the IRS and pay raxes on it, because the IRS considers forgiven debt income.
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Gifts are not taxable income, they are taxable under the Estate & Gift Tax if above a certain threshhold (think it’s $16k or so these days). COD income is income if it is *not* a gift. Gifts are also, importantly, *not* deductible to the person giving the gift. So if you give $1 do the RJ, I believe it’s not a deductible expense (in contrast to giving $1 to charity).
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It seems like if RJ does their books carefully, then they can make it so that any individual “gift” is less than the IRS threshold, thereby making the debt forgiveness tax-exempt for the beneficiary. (I think the key is that for every pair of people, person A can give person B up to $16K or whatever the cap is. So person B can get $100K of debt forgiven as long as it comes from several different people.
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That’s confusing two different taxes (I know this is confusing–it isn’t actually designed that way, but still). (1) the “Estate & Gift Tax” is a tax on gifts and bequests when you die. That’s the one with the $13,000 limitation per year. (2) the “Federal Income Tax” is a tax on income you receive when alive, including cancellation of debt income. The $13,000 cap in (1) actually has nothing at all to do with whether or not tax is owed in (2). So keeping their books as you suggest could solve (1) (although it turns out there may be a different solution to (1)), but wouldn’t have any impact on (2).
Further (3), Roll. Jub. on their website says that they are a 501(c)(4) not a 501(c)(3), so the amount you “donate” to them cannot be deducted on your individual income tax 1040.
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I suppose this is not the forum in which to sort out my misunderstandings of tax law, but my impression was that if I receive a gift of less than $13K then I don’t have to pay income tax on it.
I agree with (3), namely the donor doesn’t get to deduct the gift.
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Well I wouldn’t rely on what some anonymous commenter says for filing your tax return, but you can get a gift of any amount and not pay income taxes on it (assuming it qualities as a “gift” in the eyes of the tax law, and there are some important wrinkles and whatnot there). The $13k limitation is for the Gift tax, which is completely separate from income tax, and is usually paid by the person making the gift, not the person receiving the gift. So I could give you $100,000 as a pure gift, you wouldn’t owe any income taxes on it, but I would need to file a gift tax return and pay gift taxes on the transfer. I also wouldn’t get to deduct the $100,000 on my taxes, so the “mirror rule” would stay in place.
Hope this helps…
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http://www.irs.gov/publications/p525/ar02.html#en_US_2011_publink1000229351
mobile.businessweek.com/articles/2012-11-13/to-forgive-is-divine-then-comes-the-tax-bill#p1
http://www.businessinsider.com/rolling-jubilees-tax-problem-2012-11
I thought we could use some links. I guess I stand corrected about gifts as taxable income. It still seems like the IRS will depend on the forgiveness recipients reporting their cancelled debt income. It does not seem like Rolling Jubilee intends to report that information to the IRS, whether that’s the legally correct thing to do or not.
It would have been cool if Rolling Jubilee was some kind of cooperative trust that would just sequester bt. Instead of forgiving the debt it purchased, it would just issue membership credentials to the associated debtors.
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The expected take from a Powerball lottery never rises above the ticket price. This is because the jackpot gets divided up among the winners (and taxed), while the expected number of people winning the jackpot rises linearly with the number of tickets purchased.
Even if there were some positive expected return, I would have trouble making an ethical case for buying tickets. Winning means effectively taking “dumb money” from people who are in rather desperate financial situations.
It seems rather shameful that our governments are even involved in what amounts to a maximally regressive redistribution scheme. Perhaps it is an easy way to avoid a certain amount of discussion about taxation, but ideally, politicians should have their feet held to the fire when they enact or sustain such a policy.
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The expected value could in theory be more than the ticket price, because of the rolling jackpot: when nobody wins, the new jackpot comes from not just a fraction of new ticket sales but also the old jackpot. It never actually happens in the big national lotteries, though.
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It has always disturbed me that the odds of winning the lottery are not appreciably improved by buying a ticket. That’s a unique scam they have going there.
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ah…math people, always detailing the trees without seeing hte forest
Other points to consider in the “value” of a lottery ticket:
how much is the entertainment value (I use entertainment loosely ?) lets say you buy a ticket the day of, you get ~ 8 hours of enjoyment; for 2 bucks, that ain’t bad
Social pressure
I hadn’t appreciated this untill recently, but if you are in the office, and people are doing a pool, there is a lot of social pressure
The point is, in the real world, most things are way to complicated to evaluate on simple math odds of expectation values.
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I was disappointed when I saw this: “So when the prize goes over $175 million, that’s worth $1 in expectation.”
The payout for the winner is $175M, otherwise, disregarding 2nd and 3rd prices, nothing. Come on mathbabe, what interesting insight or result can be obtained from defining a lottery payout expectation as an odds proportion of the money pool?
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