December 25, 2008

MLB Luxury Tax: A Modest Proposal

Fear not English majors and Swift fans, this Modest Proposal leaves most infants intact.

People are outraged at the Yankees' spending spree this offseason. They're probably more outraged that the luxury tax tab to the Yankmes falls in the mid-$20Ms. If they thought about how many times we heard about the Pirates, Royals, Twins, Mariners, Rays, etc., etc., this offseason, they'd probably be more upset.

Here is my luxury tax proposal.

On April 1st, rank the teams from 1 to 30 in terms of overall payroll. Draw a benchmark between the 15th and 16th highest spending teams. Each team above the mark has to pay half the percentage they are over the line in millions of dollars to an MLB-controlled escrow fund (rounded to the nearest $100K). In other words, if the median team salary is $100M, a team with salary totalling $200M would be $100M over the line, or twice the median salary, so 100%. Such a team would owe the kitty 100% divided by two, or $50M. A team with a salary of $105M would owe $2.5M. Most likely, 20 teams would fall within 10% of the line either way.

At the end of the season, the money held in escrow by MLB is distributed, sort of. First, the pension is fully funded, including coverage for degenerative conditions likely caused by steroid abuse. Of the remainder, each team's overall MLB finish is averaged with their payroll spending, and the remaining money is allocated such that a stair-step amount is "distributed" to each team. So if the lowest-spending team finishes with the worst record, they "get" the largest share of the kitty.

Why are "distributed" and "get" in quotation marks? Because we're not rewarding owners for being cheap and teams for being crappy. The money is only earmarked in descending quantities for the teams 30 through 16 to spend on free agent players in the next calendar year. If the team is unwilling to sign a player using their share of the kitty, or is unable to attract a player for a deal that would make the kitty usable, the unused money is split 50-50 between the MLB and MLBPA for use in general funds. The concept is that MLB could use the war chest as leverage, or to buy a failing franchise, and the MLBPA could use the money as work stoppage payments and additional pension funding.

[UPDATE BASED ON FEEDBACK: I would have no problem with the kitty being usable for any enterprise that is intended to directly improve the team, such as coaching, scouting, facilities improvements, etc., and not just for use to purchase free agents. Many people have suggested it, and I guess I was just focused on the free agency issue since it's in our face. No doubt the Yankees and other big market teams have the best of everything. Of course, the tax will only be based on their payroll, though.]

Feel free to criticize away. I've only been bouncing this plan in my head since Teixeira signed with the Yankees.

Let's put 2008 into practice, using's numbers:

The midpoint salary, as I've defined it as halfway between the 15th and 16th biggest payrolls, is $80.0M. The "tax", as I've described it, in 2008, would have been:

Yankees - $80.5M
Tigers - $36.7M
Mets - $36.5M
Red Sox - $33.4M
White Sox - $25.8M
Angels - $24.5M
Cubs - $24.2M
Dodgers - $24.1M
Mariners - $23.8M
Braves - $14.0M
Cardinals - $12.9M
Blue Jays - $11.6M
Phillies - $11.5M
Astros - $5.5M
Brewers - $0.1M

TOTAL: $365.1M

Now, you don't think I have the time or insomnia to rank the remaining 15 teams to see what "share" they'd get, do you? Ah, but I do.

The first number is the number of "shares" the team would receive based on the second number, their ranking. The ranking is determined by the third number, the average of the team's payroll rank (16 to 30) and their winning percentage (1 to 30). So the Nats were last in winning percentage and 28th in payroll. Their ranking figure is 29, worst in MLB. They get the most shares.

1 - 16) Rays = 16
2 - 17) Indians = 19
3 - 18) Twins = 19.5
5.5 - 19) Giants = 21.5
5.5 - 19) Reds = 21.5
5.5 - 19) Rangers = 21.5
5.5 - 19) DBacks = 21.5
8 - 23) Rockies = 22.5
9 - 24) Royals = 23.5
10 - 25) Padres = 24.5
11.5 - 26) Orioles = 25
11.5 - 26) Marlins = 25
13 - 28) Athletics = 26
14 - 29) Pirates = 28
15 - 30) Nationals = 29

1+2+3+....+15 = 120. We take the $365.1M kitty and divide it by 120, the total number of shares. The 16th team in my rankings gets 1/120th of the kitty, one share, - $3.04M. The worst team, the Nats, get 15/120ths, or 15 shares x $3.04M, or $45.6M. See how the $365.1M of the rich teams is distributed to the poor ones, without handing competitiveness to the crappy organizations? I think this could work.

Of course, that means up to $365.1M, or about $12M/team, would have been infused into the 2009 payrolls. This would seem to elevate the salaries (at the expense of the big spenders) and thus fail to achieve what the system is partly designed to do - keep salaries down. What I think would actually happen is that the big spending teams would balk at writing 8-figure checks to the miserly owners, and the top salaries would actually come down. At the same time, the bottom feeders could field more competitive teams and they might be more willing/able to spend more in the future. I think a price point would be reached, probably around $80M to $100M, that would almost act like a de facto salary cap.

Does Teixeira sign with the Nats or Orioles if they have an extra $35M to $45.6M to throw around (for 2009 only)? Perhaps. At least it's a shot.

22 Responses:

Nikhil Verma said...

Don't they do something similar to your proposal in the NBA? I'm not sure how it's worked out but it's an interesting idea.

J-Red said...

I went ahead and worked it out. Hit refresh on your browser.

J-Red said...

And, yes, Brien and Nikhil, Barack Obama and Nancy Pelosi gave me the idea. They said it's a formula "they're working on", whatever that means.

Nikhil Verma said...

LOL, good one. I guess the Bushes would be like the Steinbrenners, if we're being political. In other words, against the escrow and your proposal?

Anonymous said...

Would the distributed money be included in the payroll for year 2? Averages would likely go up and possibly some other repercussions.

J-Red said...

Yes, Anonymous, it would be. It would have to be because that team had the benefit of additional funds.

The overall economic question that determines whether my system would work or not depends on how willing the top spending teams are to subsidize MLB/MLBPA/the low-spending teams. What you described, continuous escalation of salaries caused by pumping (at most) $365.1M into the whole system (using 2008 as an example), or about $12M/team, is definitely a risk.

What I think would happen is that the teams would cluster more tightly around a price point. The top teams would come down and the bottom teams, able to enjoy a little more parity and with a more competitive team on the field, would come up.

Anonymous said...

I just don't understand why the goal would be to bring salaries down? Why are people so obsessed with helping billionaires keep their money at the expense of the players?

i like the system, as it requires teams to spend the money. i just don't understand why people are so concerned with the billionaire owners' wallets.

Kyle B. said...

Agree with the above. The problem in MLB is not the Yankees pressing to be great but rather the complete lack of incentive for the Royals and Pirates to do any better. Their owners are utterly content to pocket the earnings at the expense of trying to win.

Stop me if you've heard this before (which is to say, stop me now), but until there is some pressure on the bottom teams to win, and there is a proper disincentive put in place for losing (the most evident being relegation, but the perverse incentive of higher draft picks does nothing to help), the system will never truly be fixed.

J-Red said...

Anonymous, under the current system the owners need to extract more and more cash to be able to pay skyrocketing player salaries. When the Yankees will pay more than every team other than the Dodgers, Red Sox and Angels can afford, it inflates the value of bit players and average rotations. That requires more and more cash on down the line.

Money enters the MLB's closed system via a limited number of sources: television, advertising, and fans. Increasing salaries increse the burden on fans. It's not about lining the owners pockets at the expense of players, or the players at the expense of owners, it's about both being lined at OUR expense to watch a sport where 20 teams are eliminated on opening day.

The Fan's Attic said...

All this will do is result in shifting of funds...yes they use it on free agents but they just take it out of another pot.

Nikhil Verma said...

J-Red says:

"The overall economic question that determines whether my system would work or not depends on how willing the top spending teams are to subsidize MLB/MLBPA/the low-spending teams. "

Fair enough. But the Yankees spending spree this last month gives me the impression that they will spend any amount, regardless of the tax they must pay to lower level teams, to get big name free agents because a) it keeps these players away from the Red Sox and Mets, b) in New York, you need big name players because of the nature of the city, and c) it's the Yankees and the Steinbrenners so they don't care.

However, the question is this: Will the Red Sox, Mets, and Angels spend too?

Jason, do you think it's possible that your idea would actually widen the gap between the Yankees and the other 29 teams?

I'm not opining. I mean, I don't know the answer one way or the other. I'm just throwing the question out there for discussion.

Anonymous said...

Interesting proposal. However, forcing the poor teams to sign free agents not a sound idea. If the Pirates go out and overpay a free agent, they are still poorly run club, and will still finish under .500. Why not allow them to award their current roster with long-term contracts? Why not allow them to use it for signing bonuses in the draft? I would go so far as to allow them to use the funds to upgrade their scouting department and baseball development personnel (Imagine if the team getting the money would poach some of the high-revenue team’s scouting and player development talent with more money? That would be novel, and probably a great approach to making a winning club.) As long as the money is accounted for and it is not going in the owner’s pockets, give the clubs autonomy in their direction.

J-Red said...


I assume you are suggesting that 29 teams will behave rationally and lower their payrolls while the Yankees will just bite the bullet and continue at $200M/year levels. If that happens, baseball is doomed anyway.

Baseball is essentially a market, and you can't have a market where one entity has practically unlimited resources and the others have very much limited resources. In the absence of a "league" (or collusion in the business sense) this results in a monopoly. The difference is that the customer, the fan, can do without this particular product.

J-Red said...

Anonymous, you are probably right that the tax share should be usuable by the receiving teams in any way that directly improves their competitiveness, whether in staff, facilities, or any other aspect.

Nikhil Verma said...


Your suggestion is a good one. I'm not criticizing your suggestion. I agree that a monopoly is bad for baseball and you are right that 29 teams wouldn't get somehow get common sense while the Yankees spend away.

What I'm saying is that I think there is this myth that exists that the Yankees spending habits correlates to their winning. Does it give them an advantage in some ways? Sure it does. But not as much as fans of small market teams think.

The Yankees haven't been to the World Series since 2003. They haven't won it since 2000. Since 2004, the Red Sox have overtaken them in the AL East due to better scouting, a better farm system, and better ownership/management.

They won the AL East for a long time but part of that is due to the fact that the Orioles were poorly managed, and so were the Red Sox in the late 1990's.

As Thom Loverro of The Washington Times points out, when did the Yankees get so good? During the time they built their farm system when Steinbrenner was suspended (Jeter was drafted in 1992, when George was spending time with his horses).

Anyway, my point is this. If the Steinbrenners want to piss away their money to finish in 3rd place behind the Rays, while watching teams like the Brewers play in the playoffs, who am I to stop them?

If the Yankees were winning the World Series every year and no other teams had a shot at beating them, then I would have a problem. But during the last 8 years, their spending patterns have only made it harder for them to win, not easier. So if you're a Yankee hater, you should be glad they keep wasting away their money.

It's like Hillary spending all this $$$ to lose to Obama. If she wants to raise record amounts of $$$ and then lose, who am I as a Hillary hater to stop her?


Nikhil Verma said...

The Yankees only have a resource advantage if it can be proved that there is a direct correlation between spending and winning. But as any Mets fan knows, that is not true in baseball, at least not in the past 4-5 years.
The real resource that baseball teams must have is a good farm system and scouting department. In that sense, the Yankees are actually at a disadvantage in terms of resources to many other teams.

J-Red said...

That may be true. It still feels like the USSR, USA, and China are in an arms race, and we're Argentina looking around going "WTF are we supposed to do?"

sploorp said...

I like it. Something definitely needs to be done.

I saw early on what a joke the current system was going to turn into. They started out with a reasonable threshold and reasonable penalties, then kept raising the threshold until few if any teams would be getting penalized. And the ones who would get penalized, would get taxed very little. The smugness of the Yankee fans also drives me up the wall. Like the rest of the league is rolling in Yankee luxury tax dollars.

Critics consider ...

If this system had been in place, the Yankees probably wouldn't have been able to sign all three of the players they did. At the very least, Milwaukee, the Nats and Baltimore's bids would have been much more competitive. As a Twins fan, it's fun to speculate that Johan Santana might still be a Twin under a system like this.

I also don't see this as forcing salaries down and making the owners richer either. Chances are, payrolls would gravitate toward the middle like you said. The average player salary would probably stay about the same.

Lastly, I agree that the money should be allocated to upgrading the team and not just signing free agents.

Anonymous said...

I would, award the money to all the teams, based on their overperforming of the payroll - highest number of shares goes to the team with highest (position - payroll) number, lowest to the one with lowest number. That would encourage teams with low payroll to compete. Additionally, it may be tweaked a bit so that teams with similar rating and higher standing get more - encourages competitiveness.

Nikhil Verma said...

The problem is that the higher ups in baseball (Selig, Bob Dupuy, everyone else) don't really want the small market teams in the World Series, besides the Brewers of course. They want the marquee names. That's also true of the NBA and NHL. The NFL is so popular and so national that it probably doesn't matter, but I'm sure Goodell wouldn't want an Arizona-San Diego Super Bowl.
So even if some small market owner of a team like the Royals or Twins were to introduce a proposal like Jason's, I would think baseball would say "no thanks".

The real issue here is how to help the Pirates, Reds, Twins, Royals, and a few other teams. But the Yankees would argue that while they may spend more money, they also play in a much tougher division, what with Boston, Toronto (who besides this year, haven't been that bad in the last 8 years), and now Tampa Bay.

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Scott said...

My idea is similarly motivated, but a little different. I would impose a roving, dual-cap system. A baseline is established using the league average payroll from the prior season, rounded to the next highest million. A 50% luxury tax would be imposed on all spending in excess of 150% of the league average, with a hard cap placed at 200% of average.

For 2009, the baseline would be $85MM, so for the 2010 season, no team could spend over $170MM, and teams spending over $127.5MM would contribute half the excess to the kitty you spoke of.

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