How Baseball’s Redistributionist ‘Luxury Tax’ Is Ruining The Game

Posted: Jul 11, 2019 9:48 AM
How Baseball’s Redistributionist ‘Luxury Tax’ Is Ruining The Game

Source: AP Photo/Jae C. Hong

Major League Baseball’s All Star Game was played this week. As usual, fans were regaled with an avalanche of statistics. Every aspect of the game has been given a distinct analytical breakdown, with experts minutely breaking  down every throw, swing and catch.

The sport’s leadership has been less precise in reviewing the financial aspects of what is, indisputably, the reason it exists: the making of money. Since 1996, baseball has operated under a “luxury tax,” otherwise known as a competitive balance tax. The idea behind it seemed logical, at first.  Teams with smaller markets needed assistance to field players who would be competitive with larger markets. Therefore, teams with salaries over a given figure (the 2019 figure is $206 million) would have to provide funds that would be used for teams spending less. Some funds go for other MLB purposes. 

Major League Baseball explains how it works: “ Each year, clubs that exceed a predetermined payroll threshold are subject to a Competitive Balance Tax -- which is commonly referred to as a "luxury tax." Those who carry payrolls above that threshold are taxed on each dollar above the threshold, with the tax rate increasing based on the number of consecutive years a club has exceeded the threshold.”

The idea, like most quasi-socialist concepts, sounded appealing but was based on flawed logic and a misreading of human instincts. The fact that is hasn’t work hasn’t led to its removal, an unfortunately similar result seen in socialist governments. Venezuela’s tragedy, the comparison of North and South Korea, and more are all examples of socialist experiments that have clearly failed, but the religious-like adherence of its devotees prevents acting on the glaringly bad results. Far too consistently, lesser spending teams have simply pocketed the handout. 

Fangraphs describes the system as a “punishment” levied against owners that do all they can to put the best product on the field. 

William Ryan Colby, in a paper presented to the Department of Economics at Amherst College found that “the marginal tax rates created by MLB’s revenue sharing systems have actually worsened balance in the league. Although the most recent sharing system begins to realign incentives, it still risks “turning a ‘good’ imbalance into a ‘bad one” by subsidizing poorly managed teams at the expense of well run teams… the incentive structures created by MLB revenue sharing had the anticipated negative effects on competitive balance.”

A logical suggestion was provided by Hal Steinbrenner, a co-owner of the The New York Yankees.  The National Review quotes him as stating “At some point, if you don’t want to worry about teams in minor markets, don’t put teams in minor markets, or don’t leave teams in minor markets if they’re truly minor…Socialism, communism, whatever you want to call it, is never the answer.”

Russ Roberts, writing for CafeHayek explains: “Even if the Yankees [a big-market, big spending team] share their revenue equally with other teams, the beneficiaries of that subsidy may decide to simply pocket it rather than making their teams more competitive.  Revenue sharing does reward mediocrity and punish excellence and as the amount of sharing grows, the potential harm from that perverse incentive gets worse.”

Just as socialist ideas, consistently advertised as a way of helping workers, inevitably leads to decreased economic conditions, so too has been the result of Major League Baseball’s revenue sharing.

Jared Diamond, writing in the Wall Street Journal. blames the system for the recent spate of surprisingly lower salary offers. “… at least some owners say the tax is a strong disincentive to overspending. “A lot of teams realize the penalty is pretty severe if you go over…”

Baseball is often seen as a reflection of American society as a whole. The recent growth in popularity of socialist ideas, a concept that has consistently led to economic, social, and political disaster, is unfortunately the latest manifestation of that.

Frank Vernuccio is the editor-in-chief of the NewYork Analysis of Policy & Government.