And tax it. A lot. Both individual winnings and bookmakers profits.

Why should gambling be taxed more than anything else?

Because gambling becomes problem gambling for some people, and that costs society money. Higher taxes offset that cost, the same way we have higher taxes on alcohol and cigarettes.

I don't buy the argument that it offsets costs, or even that there are serious costs, where it concerns gambling. I wouldn't be surprised if the law enforcement mechanisms are more costly, by comparison. Rather, it is an attempt to engineer behaviour. In that regard, it becomes a judgment call by a government that a given behaviour is not quite bad enough to ban, but bad enough to discourage. Cigarette taxes where I live (Canada) are high enough that a black market in untaxed cigarettes (largely sold via aboriginal reserves) thrives. But others will point to decreasing rates of smoking as a victory, thus justifying the policy.

How does it cost society money? When people waste money on gambling, it just recirculates to others.

>How does it cost society money? When people waste money on gambling, it just recirculates to others.

There is the odd case of areas where there are government-run gambling establishment (not uncommon here in Canada), or a lottery. That money doesn't necessarily get recirculated into the market, at least not before going through the distorting effect of being spent by the state.