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Why Must Every Activity Be Regulated?...By Hartley Henderson

Last week I tuned into a sports radio program where a couple of guests were discussing the upcoming UIGEA regulation deadline. On one side was a lawyer who claimed that the regulations should never be drafted and the law scrapped as it is unconstitutional. He went on to state that the only logical future in the U.S. for online gambling was to tax it and regulate it. On the other side was a politician who argued that the UIGEA was absolutely necessary because online gambling could never be effectively regulated and thus online gambling must forever be illegal. There was nothing new in the arguments from either side and the comments were just regurgitations of what we have heard before. After the guests left, the show took calls from listeners and most supported the tax and regulation side, (not surprising since it was a sports program), but a couple of soccer moms did take the side of the UIGEA proponents. Near the end of the segment, however, a caller phoned in and said "why are those the only 2 options?" The show's host made a flippant comment about him not understanding the situation well and went on to other callers for the rest of the segment.

That question has been etched in my brain ever since and deserves better consideration than the brush off the talk show host gave it. I have been involved with the online gambling industry from its inception. My first online service provider was CompuServe and I recall finding web sites devoted to gambling by pure luck as there was no such thing as Google at the time. I had a Bowman's phone account, but just happened to come upon an Austrian sportsbook in 1995 called Intertops while surfing on the web as it existed. I recall winning regularly at Intertops and paying the 10% betting tax that Austria commanded. The next year more gambling sites started popping up online, Intertops moved its operations to Antigua and watchdog websites similar to MajorWager were being developed to discuss the good and bad in online gambling. Most of the offshore sportsbooks were still phone only, but were in the process of developing online gambling sites. The watchdog sites worked like magic and quickly helped bettors weed the good sportsbooks from the bad. Sure, there was some risk to sending money to a foreign land, but bettors seemed willing to take that chance. The industry was in its infancy and for the most part was unregulated, but the information to make a wise decision as to where to deposit funds was available to those who seeked it. Later that year, Jon Kyl came on the scene and introduced the first version of the Internet Gambling Prohibition Act, a law that would prohibit Americans from betting online. His reasoning as to why gambling must be prohibited were not met with discern or counter arguments by proponents of the industry, but rather with the suggestion that we still hear today, i.e. that the only realistic approach for online gambling is to tax and regulate it. Not once since the industry was started did anyone come out and say that the best approach for online gambling was to leave it alone and let the market forces dictate its future. It seemed for everyone involved there were only 2 choices, tax and regulate or prohibition. So perhaps now it is time to ask that politically incorrect question: Why can't the industry be left to its own devices? Why are the only two options to tax and regulate it or to ban it completely? The talk show host wouldn't address the listener's question, but we will.

Taxation has been around forever and the tax collector has always been despised by the public. In the days of the New Testament, Jesus was scorned by Israelis because he dared to associate with "sinners and tax collectors." (Matthew 9:10-13). In the late 1700s just before the American Revolution, the public was upset about taxation, claiming "taxation without representation is tyranny" (Jonathan Mayhew). And in the 1930s during the great depression there was a tax revolt by the public who was upset about the burden it was putting on them. It is ironic that in that time the taxpayers were irate about the 11% tax rate they were forced to pay, while today Americans wilfully hand over 3 times that rate (and much higher in most other countries). The above are just three examples of where average citizens were upset with some notion of taxation, but it must also be noted that in each case it wasn't paying the taxes that upset the people, but rather what they felt was a lack of value for the taxes they submitted. In the New Testament it is noted that tax collectors were despised by the Israelis because they were being forced to pay for projects for a government they disapproved of, plus tax collectors were often thieves who charged extra and kept the money (Luke 5:27-28). In 1776 the revolt wasn't because of taxes themselves, but rather the fact that colonists were being forced to pay taxes without having their views represented in government. And the tax revolt of the 1930s revolved around the fact that the tax burden was so high that people couldn't live. Americans then argued that they were paying more in taxes than were being used by the government for services. Ordinary citizens have always understood that taxes are necessary to build infrastructure, schools, the military etc., but they tended to get angry when they deemed their taxes were being wasted or not used constructively.

In recent years, however, things changed. While a date can't be exactly pinpointed, sometime after World War II, American attitudes changed towards taxes. No longer did they feel outrage when it appeared money was not always being used properly, instead they just accepted the fact that as citizens of the country they were obligated to pay taxes as a civic duty, and elected officials knew best how that money should be spent. Unfortunately, as governments became more powerful, they developed a sense of entitlement and no longer had to justify how they were spending taxpayers' money. Now it is just accepted that citizens pay their taxes and what happens after that isn't the public's business or concern. More importantly, taxation has taken on a new purpose in the country. Instead of being just used for infrastructure, education and the like, it is now often being used as a bargaining chip by both the government and public. This is particularly true with regards to the activities which are a bit on the "dark" side. These so called "sin" taxes have nothing whatsoever to do with accountability, building infrastructure or the like but, are rather a form of extortion by the government for "allowing" the public to spend its money the way the public wants. If government deems an activity by the public as not a good use of the money it will tax it, and, of course, the bigger the "sin", the higher the taxes. Cigarettes cause cancer and are extremely addictive, so they have the highest tax associated with them. Alcohol can also be addictive and lead to other issues, so it is highly taxed. Cars pollute the environment and cause global warming, so for the public's own good the government puts high taxes on gasoline to encourage the use of public transportation. And of course there is gambling. Most state governments were hesitant to allow gambling because it can be addictive, can lead to family problems and can cause people to lose a lot of money they can't afford to lose. Until a few decades ago, legalized gambling (excluding horse racing) did not exist in most states. Today, however, all but two states have casinos and/or lotteries. The reason for this change of heart, of course, is the enormous taxes the government imposes on all gambling from both the operators and winning gamblers in casinos and in the high take out in the area of lotteries. And for the governments, the best part about taxes from these "sin activities" is that they do not have to be earmarked for anything in particular and can be put into general revenues.

While the governments did allow for the new activities to be established (or in the case of alcohol or cigarettes, to be continued), they also were not willing to let the public have them without monitoring. Consequently, the government set up rules by which they could sell or operate those activities, with those rules drafted by regulatory bodies. Regulation, of course, is nothing new and is absolutely essential in certain areas. No one in America would begrudge the FDA of its duties since monitoring food and drug preparation is essential for public safety. Similarly, the EPA plays an important role in the area of safety. For gambling, however, the issue is not so clear cut. There is no question that land based gambling in America (and worldwide for that matter) is well taxed, but one has to wonder how well regulated it is. Certainly the government has provided rules by which casinos, race tracks etc. can run, which include preventing minors from betting, but aside from that there is hardly a lot of work being done by the government in terms of regulating land based casinos. This notion that "land based gambling is well taxed and regulated" has just been accepted as a statement of fact. Similarly, the notion that alcohol is well taxed and regulated is just accepted, although there certainly doesn't seem to be a lot of regulatory work being done by the government in that area either to warrant the huge taxes on alcohol. And where regulation is required, i.e. to ensure casino slot machines are paying out properly, that minors are not entering the casino, etc., it is up to the casinos themselves to use their own money to ensure that the regulations are being met. In fact the government does very little to warrant the taxes they take. The truth is for the most part regulation in the area of these "sin activities" is just a buzz word to justify the taxes and also to make the public believe that the government is looking out for their interests.

Consequently, special interest groups representing many different areas which are currently illegal have caught on and are trying to convince the government that their activities should not be illegal but rather "well taxed and regulated." A search of that phrase in Google brings up web sites for lobbyists on everything from drugs, prostitution, sex clubs, etc. This shouldn't be surprising. The Government's past actions on other "sin activities" have made it clear that if you want something made legal from here out it has to be taxed and regulated. To quote Cuba Gooding Jr., "If you want it bad, then show me the money!" Simply making something legal because it should be is no longer an option. There are only 2 choices now, taxed and regulated or illegal.

That brings us back to the original question from the radio caller: "why are those the only two options?" The answer is simply that Americans, and for that matter most of the world, has accepted that there is no free lunch when it comes to non-necessities of life. Consequently, proponents of online gambling are willing to give in to this idea of paying taxes and agreeing to regulation in exchange for being allowed to bet. They realize at this stage there is no use trying to argue that something should be allowed to exist just because it is not harming anyone. Doing so will go nowhere in getting congressional support. If online gambling is ever legalized in the U.S. there will be a large tax associated with it and the government will throw down a bunch of rules which operators will have to adhere to (and pay for) to ensure enforcement. On the other side of the equation, the politicians who oppose online gambling, whether for religious or other personal reasons, understand that the way to quash any chance of having something legalized is to say it can't be regulated. If that premise is accepted, then the whole issue dies right then and there. Hence, John Kyl, Robert Goodlatte, Bill Frist, etc. have not tried to honestly address the issue of regulation and taxation, because to do so may mean it could actually encourage other politicians to closely examine that activity. And in Jon Kyl's case, he simply does not want online gambling legalized in the U.S. under any circumstances. Thus he has made a blanket statement that the internet can't be regulated, end of story, time to move on. And calls for studies to look at possible regulation are shunned off by him for fear that someone may prove it is possible.

The caller on the radio station had a very valid question, and in a perfect world Americans would be allowed to use their hard earned money on activities they want, provided they are not harming others. Regulation and taxation should not be issues, and online gambling should be allowed to function as it has since its inception. Unfortunately, that Libertarian type thinking is seen as taboo today, and for the most part Americans can only spend money on things they want if the government approves. And usually when that approval does come, it involves heavy taxes and some sort of regulation, effective or not.

Hartley Henderson

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