A tax-based response to a changing regulatory environment for gambling

The United Kingdom gambling sector has experienced a number of regulatory shocks over the past decade, which has led to considerable debate and controversy within the industry and policy-making communities. Although there is a well-established literature on the economic impact of the growth of gambling facilities on local and regional economies in the United States and the United Kingdom, there has been relatively little research on the optimal taxation of gambling. There has, however, in recent years been a particularly radical overhaul of the way in which gambling is taxed and regulated, traceable in significant part to the rise of Internet gambling. In particular, Internet gambling has in defined circumstances allowed bettors to avoid betting taxes levied on wagers placed on-shore. In this context, the Internet has posed a clear threat to government revenue streams. In October 2001, the UK Government responded by radically changing the incidence and structure of betting taxation in the UK, notably switching from a tax on turnover to a tax on gross profits, which was later extended to most forms of gambling. In 2012, the UK Government announced policy initiatives designed to move simultaneously closer to and further away from the 2001 model; these intiatives were introduced in 2013 and 2014. This paper considers some of the developments in the way that gambling has been taxed and addresses the theoretical arguments for taxing gambling by means of a levy on net takings rather than by means of a tax on turnover or a licence fee levied on gaming machines. The paper draws on published data provided by HM Revenue and Customs in the UK.