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.

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28 thoughts on “The Poker Ethicist: Income Tax”

  1. I generally don’t mind paying taxes; I view it as the price of admission for living a society I like and admire. And I am downright eager to pay my first taxes on any poker winnings (I’ve got a long way to go before I get there).

  2. Very nice post. If you live in a western democracy (as I do), it’s really not tough to see that you “owe” a lot to the political system you’re living in. Here in Switzerland we have an excellent public transportation system that I use almost every day, the schools are pretty good, we have all kind of insurances that would help me if I got really sick or gravely injured and we even have programs that allow me to stop working at 65 (if legislation stays the same) and still get enough money to lead a “normal” life, etc.

    As you pointed out, you can disagree about some programs and you might not need some of them, but guess what, you’re living in a democracy and that’s how things work.

    I understand that if poker is your hobby and you earn a few thousand dollars a year, you might not pay taxes for that, especially if you have an income from a job that’s already taxed and exceeds your poker earnings by a big margin. However, as soon as poker becomes your main income (or one of your main incomes), from an ethical point of view it’s pretty much impossible to argue that for whatever reason there’s no moral obligation to pay taxes.

    One of the topics for my final exams in political science was the question whether or not the state has a right to tax the income of it’s citizens. I read a few philosophers that argued against it (or at least against taxes as they are nowadays in the western democracies) but honestly none of their arguments really convinced me.

  3. I think most proponents of this type of tax evasion start with the premise that the tax collection itself is unethical and so it would not be unethical to defend yourself against it.

    Even democracies sometimes engage in immoral behavior. You mentioned slavery. If a slave runs away and hides from the government, he is acting purely out of self-interest and not as a form of protest, but you would not argue that he should use only legal political processes to try to get freedom.

    Of course, many people do not agree with the premise that tax collection is unethical. Is there a point at which it becomes unethical? In some countries, poker players are not allowed to net out poker losses. This results in tax bills that are many times higher than a player’s total profits. Is it unethical for these players to hide their income? The democratic process is no help in most cases; poker players are a small minority and most voters will not even be aware of the issue. Saying they should have to leave their country seems extreme, and anyway most governments claim the right to collect taxes from expats so avoiding a legal duty to pay is not so easy.

    • Your comparison with slavery doesn’t hold up, because slavery takes basic liberties away from a person whereas taxation does not (some philosophers say otherwise but I don’t buy that). I mean those people are very lucky to be able to make a good living out of playing a game, so they could at least give something back. Yes their achievements are based on their efforts as well, but I’m pretty sure the chances that you become a professional poker player are quite a bit smaller in a third world country.

      So I guess there are two main points for me: 1. Everyone should be happy that he lives in a society that makes it possible for him to earn good money playing a card game and therefore giving something back to the community should really be the obvious thing to do. Especially because 2. as Foucault pointed out it’s pretty much impossible to not profit from government services and based on that fact there’s a clear ethical obligation imo to pay your share.

    • Thanks- I was hoping someone would argue the other side of this, and you’ve done a very good job.

      As Christoph has said, slavery is a different case. This is an instance where basic human rights are violated and the victims don’t have access to the political process. I know there are people who compare income tax to slavery, but those people are frankly delusional.

      In the latter instance, I obviously agree that it’s a bad rule, but I don’t think that gives people the right to violate it. Misguided laws are still laws.

      Clearly this rule is a consequence of misunderstanding. As you say, most people, including lawmakers, probably don’t understand how exactly the industry works and aren’t likely to seek out further information on their own. Thus it is incumbent upon the professional gambler to educate them and advocate for more sensible public policy.

      This isn’t something that necessarily requires broad popular support. In all likelihood a lawyer or accountant would be able to help the player explain the situation and request an advisory opinion from the relevant authorities.

      In the event that they rule against him, I would say that he has a choice to make: don’t play at all, leave the country or find some other way to play legally and under sensible tax policy, or pay only the amount he believes he owes and include a letter explaining why. I don’t think that deception is ethically justifiable in this situation.

      Thanks again for the well-thought out reply.

  4. Many wealthy people (in the UK at least) avoid paying any income tax whatsoever, and they do this perfectly legally (they are playing within the rules of the game). Would you say that they are behaving ethically?. Or just- ethically insofar as they don’t break the law?

    • I would say the ethical problem lies with the tax code that makes this possible rather than with the people who play the game well.

      • Really? I’m thinking of people who utilise offshore trusts for example. Supposing it’s acutally very difficult to make a watertight law that prevents people shipping their money offshore – there’s plenty of very clever lawyers and accountants always looking for loopholes – aren’t these people behaving unethically, despite abiding by the law?

  5. A fine post…

    In the US (and in the UK), as a wealthy person, I hire a guy for a couple of grand who saves me a ton on income tax… no fancy loopholes, just thorough exploitation of deductions… however, the middle classes rarely can exploit these… so my effective rate is way lower than some poor SOB feeding a family of 5 on 75k…
    it is unjust…
    however, by playing by the rules in a system with unjust rules, am i being unethical…

    clearly yes…

    i know a professor of economics who (because of the systematic exploitation of immigrant, women of color, without education) pays his house cleaner about double the standard rate (say he pays 25 bucks an hour)…
    he refuses to exploit a system where others are exploited… but he is a marxist and has very very high standards for how he treats others…
    he also bicycles to work in 25 below in wisconsin winters and is like 75 years old because driving a car five miles (polluting) is anathema to him…

    and a final word… no where i have lived do people complain about taxes as they do in the US… now it is true, compared to European governments… we don’t get much in the way of social benefits, health care, pension, support for the poor…
    but when my lincoln driving, five car and two boat, 6000 square foot house owning, doctor friend from college whines about taxes, it makes me sick… poor bastard is hardly making it on 750k a year…
    pay your freakin share… the system was very kind to you (and your dirt poor immigrant parents)… you benefited from free public education, safe streets, subsidized state universities and med schools and now profit from a system where the rich are extremely well treated relative to the poor… (and where doctors salaries are about 2-5x what they are in the rest of the world because of a dysfunctional health care system)…

  6. Our income taxes also provide “services” like the metaphorical noose from which we all hang right now. It kind of makes me wish I had the balls to cheat on my income taxes all these years.

    • Obviously I agree that this sucks but I don’t think it has much bearing on the ethical obligation to pay taxes honestly.

      • I think it has at least a little bearing on whether or not there exists a duty to pay income taxes honestly, but then again I was a more than a little shocked and angry when I wrote the above post. Now that I have much more free time on my hands I might come back and actually try to argue the other side (and get smacked down in the ensuring debate).

        FWIW I’m inclined to think reciprocity is the strongest argument for the duty to obey the law generally, but I don’t know if it’s strong enough. The tacit consent argument (which seems to underlie “love it or leave it”) is not convincing. Hume did away with it pretty well (imo) by analogizing it to a person who wakes up on a ship in the middle of the sea. Does he have a moral duty to obey the captain’s cruel and capricious commands when his only other option is drowning in the ocean? It strikes me as somewhat clear that he does not.

        • More measured than your first response! What you refer to is ‘consent theory’, and it is part of the political philosophical theory of democracy. I ain’t familiar with the detail any more… if you google ‘stanford encyclopedia of philosophy’ and stick it in, you will find a treasure trove (and on anything else philosophical).
          Hume’s argument is a good one I think. (Saying you are ‘free’ to jump off a ship at sea is a meaningless freedom.) I use it a lot (on the left) when folks talk about the ‘choice’ America’s working poor have (‘to work at Walmart, or to work at Mobil… I suppose i do have a choice…’) ‘Free’ to seek work elsewhere or to quit (as union busters say they ought to do) – is a cynical kind of freedom.

          GREAT to see there are other philosophically inclined players around! Along with Poker, Philosophy is the shnizzle.

        • I think that analogy is a stretch. Leaving the US is hardly the same as jumping overboard. Even in the absence of 100% consent to the arrangement, it seems obvious to me that benefiting from publicly funded goods entails some obligation to contribute to them.

  7. Well, just one point. As a significant winner you probably don’t consider this :), but for the rest of us there is a significant risk of going broke one day. I heard that most of Las Vegas pros went broke at least once.

    So, if you are allowed to deduct the losses you already made to generate the profit from grinding, it seems logical to account for the _possibility_ of going broke one day later — I doubt that government will repay someone back taxes when he lose bankroll.

    You may say that it works the same way for “normal enterprises” like bakeries, that also may go broke. Well, obviously yes, but I am pretty sure that the ratio of the poker players that gets income last year but will broke in 2011 is in an order of magnitude bigger than the same ratio for bakers.

    Does it make sense?

    • I get what you’re saying, but no I don’t think you can ethically withhold taxes on the grounds that you might lose money in a future year. I do think that professionals ought to be allowed to carry losses forward, but I still don’t think that gives you the right to give yourself a write-off just because your government doesn’t allow this.

  8. Nice post Andrew,

    You highlighted several reasons why folks justify not reporting income. Interestingly, none of those are specific to poker or online poker. In other words, folks using the reasons you listed, would be likely to under-report income from any source or job. My guess is, these folks would correctly report income from other sources, primarily because it is much harder to hide. Online poker players under-report income because they can get away with it, in my opinion.

    There is one other issue involved here, and that is the unintended consequences related to proposed federal or state regulation of online poker. Most of the proponents of regulation make the argument to politicians there will be this new flood of revenue from taxing online poker. This should not be the case as poker earnings are already taxable. Proponents of regulation are openly admitting online poker income is not being reported. Perhaps if poker players were reporting their online winnings properly, the politicians would see how many people play, how much they contribute via taxes, and they would be more likely to “legalize” online poker activity. And, they might do so without the 7%, 10%, or higher vig that has been proposed in various regulation drafts.

    • You’re right about the ease of “getting away with it” (we’ll see how many people come to regret that in the coming months). My goal was to convince people who feel they can get away with it why they shouldn’t.

      I always assumed those revenue estimates were based on taxing the sites themselves, not the player income, which functionally would be a big deal in its own right though I agree that in theory it’s revenue the gov’t should be seeing anyway.

      Given your many retweets from Reason magazine, I thought you might be the one to argue against an income tax?

      • We are in agreement. I think your post demonstrates those who are justifying not paying taxes are on very weak ground.

        You are correct, the numbers I heard were always based on taxes being withheld by the site. My point is tax compliance by online players would likely generate enough revenue from individuals to provide online poker with political legitimacy, and it might even allow for regulation or outright legalization that did not include an additional tax on the site operator. This would go a long way toward keeping the game profitable post regulation.

        I’m an anarchist in the original sense: without leaders, not without law. I favor a simple but fair tax structure because it maximizes growth (a pie farmer is one who grows the pie). The current code is a disaster in so many ways, and the treatment of gambling income and losses is a prime example. Still, a true professional online player has lots of ways to use the legally system to limit the impact of taxes. Not paying taxes is simply not a good decision, in my opinion. My point about unintended consequences is if more folks paid the taxes they owe now, there would be no need for regualation in my opinion.

        Sorry to venture off topic. Thanks for another great installment of the poker ethicist.

  9. Are US online poker players morally obligated to pay a percentage of their winnings in order to financially support the entity that has now deprived them of the legal right to earn their living?

    Is this a situation where avoiding proper payment of taxes would be a justifiable protest?

    • Only if you’re willing to go to jail. Underreporting income is dishonest and cowardly.

      This is just another version of the “I don’t like how the government spends my money” argument that I address in the OP. As long as you continue to benefit from other government services, you can’t just withhold your share of the costs because you don’t like one thing the government is doing.

      The more complicated case would be if you were unable to access money that you need to pay taxes because it is tied up by the DOJ. Even then, though, I don’t think you’d be justified in not declaring the income. You’d need to talk to a lawyer and/or tax professional about requesting an extension from the IRS.

      By the way, if any Americans reading this haven’t been reporting online poker income, it’s time to talk to an expert. At this point you have to assume that the feds are aware of at least whatever money you currently have online with the affected companies and quite possibly your entire deposit/withdrawal history.

      • The US, unlike other countries, taxes its citizens even if the live permanently outside the country. So what about someone forced to leave the US now to play online poker. They hardly “benefit from other government services” any more. They will also presumably be liable to pay tax to the new host country on top of the US tax. Would such a situation finally change your stance towards the ethics of paying US taxes? (I’m not personally affected, I’m just curious.)

  10. I think you’re starting with the premise that I owe for services I never asked for. It’s as if I washed your windshield while you were stopped at a red light, then had the right to steal a few bucks from your wallet. Vote ? The Feds incurred ~$9 trillion in debt and another ~$50 trillion in unfunded promises in my name before I was ever given the right.

    Income taxes don’t pay for police / fire, which are paid by nearly exclusively by property taxes which I fully pay.

    If shit hits the fan, I don’t believe the government has my back. What of my ethical duty to protect myself and my family?

    This is not an admission that I have evaded income taxes.

    ~Bill.

    • Good points. I don’t think you’re right, but I had to think for a while about why, and that’s the mark of a good argument 🙂

      For one thing, I don’t think perfect consent is required. Obviously you didn’t sign a pre-natal contract explicitly accepting the rights and responsibilities of US citizenship, but you also haven’t renounced your citizenship as an adult. It’s understandable that you don’t like paying for a debt you didn’t incur, but you do benefit from in tangible and intangible ways from the things that debt has purchased (international goodwill, social stability, national infrastructure, security, etc.), and voluntary or not it doesn’t seem right to me that you should benefit without contributing.

      Being born in America (which it sounds like you were) may entail some consequences that you find regrettable or undesirable, but consider the alternatives. There are billions of people born into far worse circumstances who would gladly trade places with you and happily assume a national debt as their birthright rather than poverty, war, and disease.

      I also don’t think that paying your income taxes is inconsistent with making provisions for yourself and your family in the event of a catastrophe.

      I don’t want to harp too much on the question of what exactly income taxes pay for because I don’t think it’s actually an important detail. I realize that I chose some poor examples. Nonetheless, the point is that you do benefit from the things that income tax pays for (even paying interest on the national debt benefits you, because we would be far worse off economically if foreign countries didn’t have faith that the US pays its debts). Also local services like police and especially education do receive non-trivial amounts of funding from the state and federal governments.

      • Hey man, it’s an interesting discussion. I hope I can at least convince you that the issue is not black and white…

        Basically, I view your argument is – you were born into indentured servitude; and because they occasionally wash your windows at a red light (whether you asked for it or want it) it’s an *black and white ethical obligation* that you should carry the *full* debt load. That the amount you owe was largely chosen and promised to others long before you ever had a say, or were even born, is irrelevant. The point I don’t think you fully addressed, as you say that if you benefit from something you therefore owe… what’s the *moral* difference between the government and window washers at stop lights? I’m not convinced that the act of benefiting (from cleaner windshields perhaps) implies a moral obligation to owe.

        Even going further than that, half the ‘services’ they are providing me are nothing but empty promises… ~half the federal budget is social security / medicare / medicaid / interest on public debt (all these programs are expected to grow significantly as a percentage of the budget). There is no credible budget plan stating that I will receive a dime of benefits from those programs, even though they are promised me. It’s the biggest open secret that these promises must be reneged on one way or another (well before I am eligible in ~2050). Hence, the ‘service’ provided to me for *half* the federal budget is non-credible promises. It’s quite easy to justify lying to the government when you believe they are actually not providing you anything other than empty promises.

        This system is justifiable, because you have ‘options’. They are essentially as follows:

        -Pay full US taxes
        -Renounce citizenship, become a stateless man and never (legally) be allowed into the US to visit family / friends
        -Leave the country, continue to pay US taxes as required
        -Leave the country, stop paying US taxes. Risk arrest and tax penalties if you ever visit to see family and friends
        -If you are at least moderately wealthy, get a work visa in another country, work there for years while continuing to pay US taxes. Hope, after many years, (certainly not guaranteed) to earn citizenship there. Renounce US citizenship. Hope US will give you a visa to visit friends and family.
        -Say ‘fuck you’ back, and pay less than full income tax.

        Unless you are at least moderately wealthy and willing to invest years on a uncertain outcome, it’s basically a choice between owing US taxes, and friends and family. Nice choice. You’re right that I have not taken that choice.

        I’m not advocating hiding all your income or paying no taxes. I certainly love and appreciate many services various government institutions provide. I am satisfied to pay a significant amount of money in taxes. But that does not mean I’m *morally* obligated to provide *everything* they say I owe, in return for promises they have no credible plan to carry through on.

        The non-credible promise they will someday in the future wash my window at a red light does not imply a moral obligation to pay for it. That the fruits of my labor was promised by other to others (before I was even born!) is *not* a moral obligation on my behalf to provide it. I certainly empathize with anyone that hides part of their income to provide for themselves and their family, as it’s unlikely the government will.

        Whether paying full taxes *prevents* one providing for their family may be debatable, but it certainly impedes.

        Thoreau argued unjust laws should not be obeyed, and I agree; however, he was willing to go to jail in protest and I am not. Perhaps that does make me a bit of a coward.

        I’ve been a long time lurker in your blog, peace,

        ~Bill.

      • Basically, if you’re arguing that it’s morally reprehensible to freeload off of goods and services that you rely on, I would completely agree. However, if you’re arguing that the *moral* tax burden is always exactly what the government says it is, I would have to respectfully and strongly disagree.

        ~Bill.

        • Sorry to abandon this discussion, I was finding it interesting, but not as interesting as Madrid 🙂

          I don’t have time to give your argument the response it deserves, but I will say that even a person actively trying to pay what he “really” owes under your moral system rather than his legally assessed obligation ought to have serious doubts about his ability to be objective.

          • You’re right that it’s hard to be objective, but I think that’s a different issue than one of morality. My point is that if someone gets ~20% extra income through a hobby (such as poker) and decides not to report it, I wouldn’t necessarily judge it as immoral. If the question is, is morality derived from the state? I think the answer is a resounding ‘no’.

            ~Bill.

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