The Poker Ethicist: Income Tax
As “The Poker Philosopher”, and in honor of one of my favorite non-poker blogs, I occasionally consider the ethical dimensions of a high-profile controversy in the poker community. Today, in honor of the US’ April 15th deadline for filing, I address the underreporting of income, which many poker players are tempted to do when they win money on sites based overseas. Older editions of The Poker Ethicist are available in the archives.
It surprises me how openly otherwise honest poker players discuss their tax evasion. It is not at all uncommon to see thinly veiled references to money laundering or wink-and-nod jokes about unreported income on poker forums. Whereas the poker community is (rightfully) quick to heap its scorn upon multiaccounters, scammers, and even people who still play on UB, there seems to be no community norm against tax evasion.
In the United States as in many other countries, gambling winnings are subject to income tax. This is true even if earned overseas, even if the sites are not regulated in the US, and even if the income is not reported to the government by the sites.
Income tax is a crucial source of revenue for governments and provides funding for vital public goods as diverse as professional fire fighters and law enforcement, military and national defense, food safety and public health inspection, and roads and infrastructure. These are goods from which virtually all citizens benefit and to whose costs all citizens are expected to contribute.
They are also a classic tragedy of the commons. Because their costs are shared by hundreds of millions of people, no single individual feels that his own contribution will affect these goods in a meaningful way. Thus the temptation to under-report one’s income, preserving funds for the immediate gratification of personal use and continuing to enjoy public goods without contributing one’s own fair share. This freeloading is cheating as surely as multi-accounting a tournament or scamming a backer, yet it is far more accepted in the poker community.
I want now to address a few of the common justifications for this unethical behavior:
I Don’t Like How the Government Spends My Money
No one supports everything that the government does. That’s part of living in a democracy. Cheating on your taxes withholds support not only from the government programs and services you dislike but also from those you endorse and from which you benefit.
There are legitimate channels for expressing disapproval of particular government programs, or of government in general, but underreporting income is not one of them. You can campaign and vote for politicians who support your views, voice disapproval to your representatives, or participate in an organized protest.
Even nonpayment of taxes can be a legitimate form of protest, assuming that one is willing to accept the consequences. Henry David Thoreau famously chose prison over payment of a poll tax, his form of protest against legalized slavery.
Thoreau’s willingness to invite punishment for his nonpayment of taxes infused his protest with moral authority and raised awareness about the problem. A college professor of mine once said, “Martin Luther King didn’t write the Letter From a Birmingham Days Inn”. King, inspired by Thoreau, employed civil disobedience publicly to draw attention to racism and discrimination. Forcing the government to punish him dramatized the problem and brought it to the attention of the world.
Cheating on your taxes in secret accomplishes none of these lofty goals. If you have serious grievances with your government, underreporting your income is a cowardly and unethical response. I suspect that in most cases this is merely a pretense for not wanting to pay one’s fair share, but those who really feel strongly about the issue should be issue to make their opinions known publicly and accept the consequences.
I Don’t Use Government Services
Do you drive? Do you fly? Do you have a cellular phone? Do you buy food and otherwise participate in commerce? If your house caught on fire, would you want to have it put out? Do you enjoy not being robbed in the street or invaded by hostile neighbors? Then you benefit from government services.
It’s virtually impossible to avoid. Unless you are a hermit with a self-sustaining garden and a shotgun (and probably even then), you benefit from government services. If you think that the amount you pay is out of proportion to the benefit you receive, you’re probably wrong, but in any event it doesn’t matter. What you pay and what you receive and are determined by a democratic process of which you are a part. Which brings us to…
My Taxes Are Too High
Again, everyone would prefer to pay lower taxes. This isn’t something you get to decide unilaterally. Your taxes are set by your government in proportion to the services provided by that government. Of course everyone disagrees about the proper balance here. That’s what politics is for. The process is far from perfect, but there is a process.
If you have deep disagreements with your government’s tax code, then you can advocate for change or you can leave. You cannot ethically choose to remain a citizen, benefit from government services, and withhold your contribution thereto.
Ironically, if no one cheated on their taxes, then everyone’s tax rate would be lower. Refusing to pay your fair share simply distributes your share to honest taxpayers, who really do end up paying too much because the scofflaws are not paying enough.
The System is Designed to be Gamed
It’s true that most tax codes are designed with quite a few loopholes, exceptions, and deductions. Tax codes are designed with the understanding that many citizens will aggressively take advantage of these opportunities to decrease their tax burden. Accountants skilled in this process command huge salaries.
However, there is a difference between taking advantage of loopholes and underreporting income, and it’s essentially the difference between cheating and playing a game fairly. If you report your income honestly, track your deductions aggressively, and end up writing off a fair bit of your income as untaxable in a way that you can defend in an audit, then more power to you. If you underreport your income and exaggerate your expenses, then you are cheating.
This post is addressed to all of the honest, upstanding poker players who wouldn’t dream of cheating during a game, scamming a backer, or welching on a bet. Sorry to break it to you, but if you aren’t paying tax on your online poker income, then you’re a cheater, no two ways about it.