COLUMN-Macau big for casinos, taxman: David Cay Johnston

Tue Aug 16, 2011 7:00am EDT

The author is a Reuters columnist. The opinions expressed are his own.

By David Cay Johnston

MACAU Aug 16 (Reuters) - The Lisboa, the oldest casino in this thriving gambling city, features a polished black marble floor flecked with what looks like glittering gold. While all gamblers eventually find only fool's gold, like the glittering pyrite in the marble floor, government is mining real gold from the casinos here.

Macau, a special administrative region of China, is raking in 8 billion patacas (US$1 billion) a month this year in casino taxes.

That is up by almost half from last year and likely to grow much more in the next few years as Chinese with wads of renminbi search for excitement, glamour, commercial sex and a brief escape from the rigors of life back home, not to mention the hope of striking it rich at the tables.

The casinos generate so much tax revenue that the Macau special administrative region cannot spend it all, anomalous proof that government is not an unlimited user of money.

Last year the Macau government took in more than twice what it spent. The budget for 2011 anticipates the government spending more than three-quarters of its revenue as the 22,600 civil servants -- every 25th resident of this city of more than half a million -- get their first across-the-board pay increase since 2008.

These huge tax surpluses free Beijing from having to spend any money in Macau, the only place under Chinese rule where casinos are legal.

The casino taxes can be seen also as an indirect way for Beijing to capture some of the vast untaxed income in China, where only 3 percent of workers pay income tax and it is universally believed that many fortunes made in business escape the nascent Chinese tax enforcement system.

CASH FLOWS IN

Of course it has not gone unnoticed by Beijing, or for that matter Washington, that so much money flows into Macau across the bustling border crossings at the mainland, on the jetfoils and ferries from Hong Kong and in the jumbo jets landing at the airport. Spies are said to lurk everywhere in Macau, as ubiquitous as the working girls who gather legally at the casino bars.

The Chinese spies are looking for both high-rolling government officials, a sure sign of corruption given Chinese civil service salaries, and for people who might let state secrets slip. The Americans scan for people who might hold valuable military and other secrets and who, having put themselves in vulnerable positions, can be coaxed into selling what they know.

Everywhere around the edges are criminal gangs that lend money to gamblers, encouraged by laws that make casino markers, as credit slips are known, collectable in Macau and Hong Kong, but not the Chinese mainland.

The big markers are held by associates of junket organizers who, workers and customers at the casinos say, are willing now and then to have a customer just disappear because it helps to encourage repayment by the rest of the borrowers.

For those unwilling to leave China with renminbi stuffed into men's packs (or murses, as they are known in America) there are jewelry shops that take Chinese plastic and hand over not diamonds or watches, but cash with which to gamble, a subtle form of money laundering.

For those who wish more discretion, the Las Vegas Sands -- operator of the Venetian, Sands and Four Seasons casinos -- operates seven private jets, some of which fly back and forth to the company's Marina Bay casino in Singapore. Going to Singapore means gambling where Macau, and thus Chinese, officials lack access to casino videotapes.

PROFITABLE DESPITE HIGH TAXES

The six casino companies pay in taxes almost 40 percent of what their players lose, compared to 5 to 15 percent in Singapore, 7.75 percent in Las Vegas and 9 percent in Atlantic City. The American casinos also pay corporate income tax.

Despite Macau's high taxes, its casinos are immensely profitable.

Partly that is because gamblers pay high prices in the form of the vigorish charged at the baccarat tables. Baccarat accounts for close to 90 percent of the money that Macau players lose.

In Atlantic City the vig, as it's called, is under 2 percent. In Macau it is almost 3 percent. So Macau players pay about 50 percent more vig because of the higher casino tax.

Almost half the world's people live within a five-hour flight to Macau, ensuring a steady torrent of players and tax revenues even when the long economic boom in China slows, as it must someday.

Steve Wynn's Wynn Resorts (WYNN.O) runs casinos in Macau and Las Vegas. Last year Macau generated 69 percent of company profits and 77 percent of cash flow, a measure of how China prospers while America struggles.

Cash flow from the Las Vegas Sands' (LVS.N) Macau casinos last year was four times what its Las Vegas business generated. Its Macau cash flow, as measured by the company, grew 47.5 percent from $842 million in 2009 to $1,242 million last year. And its new Sands Marina in Singapore, although open only eight months, brought another $642 million of cash flow.

The Macau Venetian has more than 550,000 square feet (50,000 square meters) of gambling floor, making it 3.5 times larger than the Trump Taj Mahal in Atlantic City and infinitely more profitable.

Across the street from the Venetian, new hotel towers are rising for Conrad, Sheraton (HOT.N), Holiday Inn and perhaps other hotels as the number of Chinese with money to play with grows along with the tax revenues generated by the money they lose.

There are many lessons here for America. One is that higher taxes do not necessarily mean less business. (Editing by Howard Goller) (david.cay.johnston@thomsonreuters.com)

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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