Tuesday, April 17, 2007

Soak the rent-seeking gambling firms

The decision of the Victorian Government to levy an extra $1300 charge on poker machines to help fund health care is an interesting one. It takes the levy per machine to $4333 which, Tattersall’s chief executive Dick McIlwain laments, could ‘prevent further investment in the industry’ (AFR today, subscription only).

The extra-normal profits the gambling firms make (Tattersalls, Tabcorp and PBL) are due to the monopoly privileges they enjoy in owning gambling capital. These monopoly privileges are awarded by the State government.

Victoria’s gambling licences are due to be renewed in 2012 and the bidding firms will make smaller bids for licence renewal as a consequence of these higher tax levies. They will also reduce their bids as a consequence of the apparent regulatory risk they encounter in operating in a political and community environment that is basically hostile to their continued existence – in 1999 the levy was set at $333 per machine then in April 2005 the Government raised the levy from $1533 to $3033. Overall, the levy has trebled in 2 years. It is still, however, only a tiny fraction (about 4%) of revenue yielded per machine:
Tattersalls earns an average of $257 per machine per day, roughly $93,800 a year, while Tabcorp earns $263 per machine per day, about $96,000 a year.

The increased charges are a good move. Victoria doesn’t want increased investment by this industry – indeed we would be better-off with a smaller, more regulated industry given the scale of the social disaster inflicted by the introduction of pokies. While Mr Bracks likes to forget it, around 87% of Victorians favour slashing poker machine numbers. The public income generated from pokies is based on a regressive tax built on human misery. We could also do without the post-politics careers for ex-Labor pollies funded by big gambling. We would also be better-off raising this revenue as a congestion tax levied on Melbourne’s traffic.

The large gambling firms take no risks and not developing innovative or new products. They deserve at best a competitive return on assets employed. Governments should decide on the basis of community values to optimise the scale of the delivery of gambling products – this will presumably be lower than the scale that would maximise delivery of monopoly rents. It should then tax all of these rents away to ensure at most a competitive return on capital advanced.

The recent tax hikes should not leave these parasitic businesses under any illusion about the propensity of future governments to increase tax rates to capture any increased rents.


Francis Xavier Holden said...

I agree with your reasoning and almost all your words.

What is the rational economic argument for what gambling revenue should be spent on? Are we better to spend on capital / infrastructure - upside - if pokies revenue declines or disapears (which perhaps should be our long term goal) then we still have the long term useful buildings etc.

Downside - if revenue declines we are facing a decline in infrastructure invest.

Or if we use pokies revenue for recurrent (groceries / cakes/ grog/ holidays) - if it declines we just reign in our "non essentials".

hc said...

The revenues should be spent on the social investment yielding maximum returns.

No reason to tie it to anything in particular.