MLB’s Luxury Tax Serves Only to Suppress Salaries, Needs to Go

I need to rant. Both of my last two posts have touched on the Cubs’ relationship to the luxury tax cap (formally known as the competitive balance tax). I refrained in both instances from commenting on the insanity of the luxury tax itself, but no longer.

Among the myriad issues baseball needs to address in the next collective bargaining agreement, none is more central than the removal of the luxury tax. This penalty is nothing more than a means of suppressing player salaries in an era of record revenues. Its elimination should, and must, be the primary focus of the players association in the next round of bargaining.

To explain why, I need to start with some fundamentals. On a financial level, baseball has two distinct, ongoing financial rivalries. The first is the competition between the players and the owners. Most people understand the motives of both sides in this fight: The players want a larger share of baseball revenues to be paid out in salary, while the owners want to keep as much as possible for themselves.

The second battle is the large market teams vs. small market teams. Large teams, like the Yankees, have the financial wherewithal to outspend small market teams, like the Brewers, by a 4-1 margin. The owners of these smaller markets successfully argued that if wealthier teams were allowed to simply outspend their competition, the larger market teams would always win.

The smaller-market teams convinced their fellow owners that, in addition to being at a competitive disadvantage, the smaller teams would lose fans and money and would eventually collapse, taking the entire league with them. I emphasize the word “convinced” because, as I explain below, I think the smaller market teams conned the Goliaths of the league. Regardless, large market owners agreed to mechanisms to narrow the financial gap between teams in the interest of parity.

The owners used two mechanisms to do that: Revenue sharing and the luxury tax. Revenue sharing, as its name suggests, amounts to wealthier teams sharing profits directly with the poorer teams. The precise mechanics of that process are unimportant for the purpose of this post.

The luxury tax penalizes teams that have payrolls above a preset limit and the practical effect of these penalties is that teams spend less on players. This was made abundantly clear this offseason as the Yankees and Dodgers shed payroll to stay under the luxury tax and free agents sat unsigned through most of the winter.

The problem with the luxury tax is that it is a solution to a problem between owners that reduces salaries among players. Revenue imbalance is an ownership problem, so its solution should be confined to ownership as well.

Some might argue that parity is a player issue because without a healthy league, there are no multi-million dollar salaries. This is a fallacy. One need only look at European soccer to rebut the argument that payroll disparity kills sports leagues. The top two teams in La Liga (the Spanish soccer league), Barcelona and Real Madrid, outspend their mid-tier rivals and low-tier rivals by 10-1 and 30-1, respectively.

Yet La Liga remains financially healthy. Similar disparities exist in Germany’s Bundesliga and UK’s Premier League. Baseball would exist with or without revenue sharing, so asking players to take a pay cut because the Brewers owners conned the Yankees is absurd.

Bonus Feature – Daydream Cubs: 1990

In a parallel universe where Moshe was transported back as GM of the 1981 Cubs, we rejoin the Daydream Cubs. Click here for 1989, or check out all drafts & rosters to date.

1990 Draft: (#) Player’s real-life selection round, AS= All-Star; HoF = Hall of Famer; GG = Gold Glove

  • Round 1: Mike Hampton (6) – SP: AS (x2), GG (x1), Cy-Young runner up (x1)
  • Round 2: Andy Pettitte (22) – SP: AS (x3), Cy-Young runner up (x1)
  • Round 3: Jorge Posada (24) – C: AS (x5)

1990 was a really good draft for the Yankees in real life. The 1990 Daydream Cubs are identical to the ’89 variant in roster and production. The only real difference is that the 1990 team runs a $2 million deficit. Rule 3 allows this deficit thanks to surpluses in 1988 & 1989, and the team will return to the black in 1991.

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