He shows that luxury taxes that are uniformly imposed as a linear function of a club's payroll and that are not redistributed to other clubs do not affect club profitability because the decline in salaries equals the increase in taxes.
Ajilore and Hendrickson (2005) analyze the effect of luxury taxes on competitive balance in MLB by empirically estimating the impact of luxury taxes on team competitiveness.
In the present paper, we add to the literature by providing a welfare analysis of luxury taxes in a professional team sports league.
The following model describes the impact of luxury taxes on social welfare in a professional team sports league consisting of an even number of profit-maximizing clubs.
Luxury taxes are an important way to increase competitive balance in professional sports leagues.
During the life of luxury taxes on passenger vehicles, the sales price threshold was indexed to reflect inflation, in increments of $2,000, and the tax rate was decreased as part of the phaseout of the tax legislated in the Small Business Job Protection Act of 1996.
000 1997 8 36,000 1998 7 36,000 1999 6 36,000 2000 5 38,000 2001 4 38,000 2002 3 40,000 Figure D Luxury Taxes, Fiscal Year 1992 Type of tax Dollars Aircraft 151,000.
Because events in professional sports have changed rapidly, neither study considers the impact of luxury taxes in any detail.
This paper both derives the implications for luxury taxes in professional sports, and re-examines the impact of revenue sharing within the context of a less restrictive demand function.
Although Canes (1974), and Brown (1994) examine revenue functions that are not strictly based on relative quality, neither study yields a comprehensive examination of the impact of revenue sharing and luxury taxes on both competitive balance and player salaries.
In general, luxury taxes will lower salaries, since the tax increases the marginal resource cost of acquiring talent.