Tax Distortion

Jeff Passan discusses the current free agent impasse and the wider problems with MLB labor relations. One problem is that the union didn’t understand taxes. The competitive balance tax (CBT) is cited as a big reason by teams for the slow free agent season, but the union likes the CBT:

The consequences are obvious. Officials with the Los Angeles Dodgers and New York Yankees, two teams looking to dip beneath the threshold and reset their base tax burden to 20 percent after paying a 50 percent overage for constantly exceeding it, have acknowledged they certainly would have spent more this winter were the threshold higher, according to sources.

A memo sent by the union to players upon the completion of the CBA in 2016 highlights not just the missed opportunity but a view of CBT penalties that multiple executives said simply doesn’t compute. The memo, obtained by Yahoo Sports, emphasizes the victories the union gained in the new agreement and, under the heading “CORE ECONOMICS,” says: “Increased the tax burden for the highest and most habitual CBT offenders.”

Though theoretically good for competitive balance, the tax has offered high-revenue teams this offseason an excuse from spending. Compound that with upward of a dozen teams either spending insignificant sums or straight-up tanking, and what long has been a robust free agent experience suddenly is fraught with pressure to accept undervalued deals.

Taxation is a tough business. Taxes in general discourage the activity taxed. Prices are signals, and raising prices through taxation sends the message, “Consume less of this.” That turned out to be a better solution to the alcohol abuse problem that prohibition tried to solve, for example.

The competitive balance tax, along with free agent compensation, raises the price of a free agent. It sends the message, “Consume fewer free agents,” or “Pay free agents less.” The tax became so punitive that even the Yankees noticed.

Since the MLBPA reopened the CBA to deal with the steroid issue, MLB has been cleaning the union’s clock. The MLBPA was once the greatest union ever, but now they appear not to understand fairly basic economics. It’s not clear what they can offer the owners to move them away from rules that limit free agency. They never thought the front offices would figure out how to game the system to their advantage. Thirty years of ever rising salaries lured the union and the players into complacency. Instead of fighting for ever increasing freedom of movement for players (fewer years to arbitration and free agency, dismantling of the draft, no caps on foreign spending), they worked to keep the number of free agents small, as the lack of supply appeared to drive up prices. That model doesn’t work anymore, and the union doesn’t have a way out.

from baseballmusings.com http://ift.tt/2DDlgnO