ISET

ISET Economist Blog

A blog about economics in the South Caucasus.

Lock, Stock and Two Smoking Barrels

“All the evidence shows that God was actually quite a gambler, and the universe is a great casino, where dice are thrown, and roulette wheels spin on every occasion. Over a large number of bets, the odds even out and we can make predictions; that's why casino owners are so rich. But over a very small number of rolls of the dice, the uncertainty principle is very important” – Stephen Hawking.

Casinos, totalizators, and other gambling institutions are very popular in Georgia. According to the study “Gambling in Georgia – Second Report,” conducted by Transparency International Georgia in 2015, 6% of 1867 randomly interviewed people answered “yes” to the question whether they or their family members were engaged in gambling for money, including online. This figure, in my opinion, is too low, underestimating the potential engagement in gambling among Georgians. The simple reason - it is more difficult to say “yes” in response to the question of whether you or your family members are gambling, even if you are guaranteed anonymity. Far too many respondents may not be aware whether their family members are involved in any kind of gambling, or they simply do not want to reveal it.


EASY ACCESS TO GAMBLING

Let me tell you my story of gambling. After moving back to Georgia from Russia in 2007, I had my first experience with gambling at the age of 16 in Terjola. The words “football” and “totalizator” were on everyone’s lips, and you could buy a newspaper with bets on matches in every corner-shop. Neighbors, relatives, classmates - everyone was obsessed with predicting the results of football matches: who will win, how many goals would be scored, which team would get more yellow cards, which team would pass down more corners - you could make your bet on nearly every little detail of the match. The first ticket I saw was at home, while my uncle was making his bets. As a big fan of football, I got very interested in this process, and so I made the decision to fill out my very first ticket. Of course, at that time the internet was not available in Terjola (as was the case with most other cities in Georgia), and we were giving our handwritten bets on a piece of paper to a man working at a small newspaper kiosk. He took those bets to the local totalizator in Zestaponi.

My first bet was 1GEL, and my prediction was only wrong for one match (by the way, it is said that gamblers only remember the bets where just one match “spoils” the bet). Still the loss of 1GEL didn’t discourage me, and I continued making my 1GEL bets every weekend (as most football games are conducted on weekends) with my uncle. At the time, my main goal was not to win. I was taken in by the entire process of making bets and discussing which team would win and why. In fact, discussing the games with my classmates next day at school was the best part of this experience. As Dostoevsky describes in “The Gambler”: “No, it was not the money that I valued—what I wanted was to make all this mob of Heintzes, hotel proprietors, and fine ladies of Baden talk about me, recount my story, wonder at me, extol my doings, and worship my winnings.” The Gambler had a point - when gambling becomes more than just a game, it can evolve into a pathological, obsessive habit. Perhaps I was lucky that gambling, for me, was still merely part of an analytical game played with my classmates.

What strikes me now is how easy it was for us to gamble at such an early age. The only obstacle between us and the gambling industry was that man working in the newspaper kiosk. He could refuse to take a young gambler’s bet to Zestaponi. He didn’t, and we continued to play.

After passing entrance exams into TSU and moving to Tbilisi I faced a whole new world, with lots of casinos, totalizators and slot machines. In Tbilisi, age was more of an obstacle than in Terjola, but it was easily camouflaged with a beard. As for online gambling, it was enough to fill in personal details of any person of full legal age (one can use personal details of his friend, acquaintance or a relative).

While studying at university, my daily budget was 5GEL including transportation, lunch, and Xerox copies. I tried to expand my budget constraint by making extra money from gambling: I thought of some “winning tactics” and I tried them on totalizators, slot machines, roulettes, and online poker. After a few tries I realized that the only winners in the long run were the casino owners. Well, in my case the foray into gambling ended up being just a waste of time and nerve. Unlike some of my other friends, I was always sticking to my miserable budget. Others were taking their phones, laptops, TVs to pawnshops or stealing items from their homes. In very extreme cases, some of the gamblers I knew even lost their scholarships and money for tuition fees sent by their families from the village.


THE ECONOMICS OF GAMBLING

Regulation of gambling has become a very popular issue in Georgia. Prime Minister Giorgi Kvirikashvili even claims that online gambling should be more regulated (up to and including prohibition). Politicians, however, are not very interested in shutting down gambling completely. They know that the gambling business can be a boost for the economy -  besides the direct positive effects on tax revenues coming from permit duties and gambling duties, casinos are a source of employment, and a source of much-needed income from the hotel and tourism industries.


ECONOMIC BENEFITS FOR GEORGIA: NOT ENOUGH OF A GOOD THING?

Casinos are definitely a source of tax revenue in many countries. But how much does Georgia get from the gambling industry? Casinos and other gambling institutions in Georgia do not pay a tax on profits. They pay a fixed Permit Duty and/or a Gambling Duty, which differs by location. For example, no license is needed for online gambling, but the owner of a website is required to pay 30,000-60,000 GEL quarterly (Table 1). Roughly speaking, one popular online gambling website needs just 3-12 days to earn this amount of money (author’s calculation). Of course, there are some online sites where the number of gamblers are very few and it is difficult for them to collect this amount of money quarterly. Replacing the fixed duty with a percentage tax could make the online gambling market more competitive. Moreover, it might increase revenues from taxes.

Table 1: Type of gambling and their duties by location

Type of Gambling Permit Duty (annual) Gambling Duty (quarterly)
Online games No permit duty 30,000-60,000
Casinos   15,000-30,000 per table
Batumi, Dusheti, Kobuleti and Borjomi 250,000
Akhaltsixe 100,000
Kazbegi,Tskaltubo, Sighnaghi No permit duty
Casinos in hotels with more than 100 rooms in Batumi, Kobuleti and Khelvachauri No permit duty
Casinos in hotels with more than 80 rooms in Anaklia and Ganmukhuri No permit duty
Other 5,000,000
Slots 50,000 - 200,000 1,500-3,000 per slot
Totalizators   No gambling duty
Tbilisi 200,000
Batumi, Kutaisi, Rustavi 80,000
Other 40,000

Source: Revenue Service

Since 2005, tax revenues from the gambling industry have increased, and in 2015 they amounted to 116 million GEL, which accounts for 1.4% of total tax revenues. Considering the size of the gambling industry, this does not seem like a lot of money. Most of this money, however, goes to the budget of the local municipalities (Figure 1), and accounts for anywhere between 5-45% of their revenue. Therefore, while we can say that tax revenues form gambling are important for supporting municipal budgets, the tax structure may not be efficient enough, giving windfall profits to the gambling industry in Georgia.


ECONOMIC BENEFITS VS SOCIAL COSTS

Gambling is a very controversial subject. Some think of it as just an innocent pastime. Others argue that it comes with a cost to society. Nobel Prize-Winning Economist Paul Samuelson wrote about gambling:

“There is a substantial economic case to be made against gambling…it involves simply the sterile transfers of money or goods between individuals, creating no new money or goods. Although it creates no output, gambling does nevertheless absorb time and resources. When pursued beyond the limits of recreation, where the main purpose after all is to “kill time,” gambling subtracts from the national income.” (From Economics, 6th edition, 1970)

The main argument against gambling is that it is addictive. Sometimes, a gambling habit can have serious and even fatal consequences: you can read in the news about someone’s bankruptcy, how a person lost everything: money, an apartment, or a car, to gambling. Gambling can be the reason for divorce and suicide, conflict and murder. Easy access to gambling in countries with high level of unemployment and poverty (especially among youth) promotes addiction to gambling at early age, worsens socioeconomic conditions, and fuels criminal activities (Grinols & Mustard, 2006).  According to “Gambling in Georgia – Second Report,” 63% of people interviewed think that the gambling business in Georgia should be completely banned, and 29% were of the opinion that it should be restricted. This public opinion underlines the social demand for new regulations in the gambling industry.


SMART GAMBLING IN GEORGIA?

Gambling policies should be smart. As the gambling industry brings jobs, pays taxes, and promotes tourism development, policies that intend to decrease the level of pathological gambling should focus on discouraging people from gambling rather than simply prohibiting casino and online gambling.

What are some of the possible policy options?

• The registration procedures for online gambling websites could be stiffened: the registration process should not be about merely copying the information from an ID card. It should also include verification of identify, uploading a personal photo, sending bank requisites, etc. A more secure procedure would create an additional barrier to gambling, and will exclude people under the legal age.

• Introduction of national self-exclusion schemes, which means that people who recognize that they have a problem with compulsive gambling voluntarily ask national authorities to exclude them from gambling for a length of time (the exclusion period can vary from several months to a lifetime exclusion). National authorities provide the list of self-excluded people to all licensed gambling venues and to online gambling businesses. As a result, people with a gambling addiction problem will be not allowed to play in gambling venues and their online gambling accounts will be automatically deleted. This system is in place in Denmark, Spain and France.

• The money won on gambling by Georgian residents should be taxed (for example, the rate could be same as income tax: 20%). This would discourage individuals who are engaged in gambling for money, not for entertainment. Furthermore, this would not influence tourists who are gambling just for fun. This kind of regulation is in place in the U.S., where residents of Japan, Russia, Turkey, South Africa, Tunisia, Ukraine and almost all EU country are exempt from profit taxes, while U.S. residents are not. Likewise, money won by Georgian resident on foreign online gambling website should be taxed.

It is 16:09 now, Thursday, and 7362 people are playing poker online on only two totalizator websites (this information is available to anyone who is registered on the website). It is difficult to determine how many people are playing in other online casinos and on other sites, and how many are actually physically raising their stakes in casinos. One thing is clear – the gambling industry in Georgia is very profitable. Taking on the interests of this industry by taxing the profits and/or income of gamblers may be a formidable task, but Georgia can ill afford not to do so, especially considering the shrinking government revenues and strong pushback from the society.


See our article usage guidelines

Rate this blog entry:
2 Comments

Related Posts

Comments

 
Eric Livny on Monday, 07 November 2016 17:55

I am very glad you managed to survive, Giorgi, and write this very important article!

Beyond the three smart policy options you mention, one could also consider having a state monopoly on gambling, giving it a more civilized form of "lottery", etc. There are several benefits to a state-owned and state-managed gambling industry. First, it is much easier for the state to restrict access to under-age gamblers and known/self-declared addicted gamblers. Second, ALL profits generated by the gambling industry (not just a small tax) are absorbed by the budget.

This is exactly what happens in Israel, where private gambling is banned. All profits from Israel's state-run lottery and football totalizator, called "Sport-Toto", are invested in youth sports facilities, childcare centers, recreation parks, etc. And these are not insignificant amounts of money.

The best thing about a state-run gambling industry is that it represents a VOLUNTARY form of taxation. Gamblers help finance public goods and services, and they do so voluntarily, without coercion.

Anybody familiar with Germany's 18-19th century philosophers, will immediately recognize something very special in this oxymoron-sounding combination: voluntary taxation. Indeed, what is voluntary taxation, if not that magical meeting of Will and Necessity, that elusive ideal to which humans should presumably strive in designing their social and political institutions?

Think of it. Taxes are an "evil" that is necessary for the provision of law and order (and maybe a few other things as well) in a society. A happy society should know how to organize its institutions so that paying taxes becomes a pleasure.

I am very glad you managed to survive, Giorgi, and write this very important article! Beyond the three smart policy options you mention, one could also consider having a state monopoly on gambling, giving it a more civilized form of "lottery", etc. There are several benefits to a state-owned and state-managed gambling industry. First, it is much easier for the state to restrict access to under-age gamblers and known/self-declared addicted gamblers. Second, ALL profits generated by the gambling industry (not just a small tax) are absorbed by the budget. This is exactly what happens in Israel, where private gambling is banned. All profits from Israel's state-run lottery and football totalizator, called "Sport-Toto", are invested in youth sports facilities, childcare centers, recreation parks, etc. And these are not insignificant amounts of money. The best thing about a state-run gambling industry is that it represents a VOLUNTARY form of taxation. Gamblers help finance public goods and services, and they do so voluntarily, without coercion. Anybody familiar with Germany's 18-19th century philosophers, will immediately recognize something very special in this oxymoron-sounding combination: voluntary taxation. Indeed, what is voluntary taxation, if not that magical meeting of Will and Necessity, that elusive ideal to which humans should presumably strive in designing their social and political institutions? Think of it. Taxes are an "evil" that is necessary for the provision of law and order (and maybe a few other things as well) in a society. A happy society should know how to organize its institutions so that paying taxes becomes a pleasure.
Giorgi Vashakidze on Monday, 07 November 2016 22:05

Hi

Already Registered? Login Here
Register
Guest
Wednesday, 26 June 2019

Captcha Image

Our Partners