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The Government’s Poker Face

Wed, Jun 29, 2011 - 10:47am

Recently, debate in Congress over the legalization of online poker has been heating up. The clamor is a direct result of April 15, 2011, dubbed "Black Friday" in the poker community.

On this date, the FBI shut down the three largest online poker sites, seized their assets, and charged the founders with felonies. Charges included bank fraud, money laundering, and violations of the Unlawful Internet Gambling Enforcement Act (UIGEA) of 2006.

UIGEA was attached at the last second to the non-controversial (and widely perceived as essential) SAFE Port Act after several previous attempts to outlaw online gambling failed to pass. Online gambling has technically been illegal since the passage of UIGEA, but until Black Friday, enforcement had generally been lax.

Poker is the most popular form of Internet gambling by far, so the reverberations throughout its community have been the largest. It is also the only form of gambling that can legitimately be considered more a game of skill than of chance, a key difference being emphasized by advocates of legalization.

We here at Casey Research generally believe that all voluntary interactions between adults should be legal, provided they don't violate another's rights. Gambling certainly falls under this category, but let's give the feds the benefit of the doubt and examine the evidence.

The odds in any form of gambling can be boiled down to the house edge, or the advantage the house has over the player. For example: the house edge in Blackjack, when played with proper strategy, is 0.8%. So for every $100 you "invest" in the game, you'd expect $99.20 back. Poker differs in that it's played against other competitors rather than the house, so the house edge is in the form of a "rake," or cut of the pot, which is typically around 5%.

Obviously, this is a raw deal for the patrons. With the exception of poker players, all gamblers are guaranteed to lose over the long run. Even poker is a zero-sum game, with the vast majority of the crowd losing money. Given these facts, it's conceivable that Congress just wants to prevent us from squandering our wealth.

Of course, the government itself offers gambling in the form of lotteries. If our benevolent Big Brother really wants to protect us from the usurious advantages of online casinos, its own gambling systems should at least offer better odds. Do they?

house edges various casino games vs. state lotteries

Not exactly. In fact, it's tough to overstate just how horrible state lottery odds really are. Your odds are 7,500% better playing craps than buying the average state lottery ticket.

We can draw many conclusions from this data, but two stand out the most. First of all, the free market provides overwhelmingly superior and cheaper gambling entertainment than does the government. No surprise there, as this principle applies to every product and service under the sun.

Second, the government's professed intention of saving us from ourselves is clearly a guise. In reality, the feds don't like when their own cut is diminished, so they attempt to eliminate or assimilate competition. As is usually the case, Washington is self-interested and is using force to enhance its own growth.

To drive the point home, the bill currently circulating through Congress would require online gambling sites to impose a 28% withholding tax on all winnings, an additional 2% federal tax would be levied on the gambling sites, and individual states would have the option of imposing another 6% tax. To top it off, the sites would be required to collect each player's personal information, such as address and Social Security Number, and provide it to the government.

And don't try to deduct gambling losses on your tax return. You can only deduct losses up to the amount of your winnings, which is the IRS's roundabout of saying the losses are not deductible.

So for all you online poker aficionados out there, we sympathize. You'll likely get your game back, but not without paying Uncle Sam his protection money your fair share.