The luxury tax is paid as per the collective bargaining agreement instituted in 2002. In this CBA, the level put between the 5th and the 6th team was changed by MLB. The payment, however, is done by a threshold put for individual teams such that a certain limit is not surpassed. This means that each team can take charge and control of their payment as they do not compete with any other regarding pay. Previously, the teams paid the taxes if they surpassed the 5th position in the league. So the luxury tax payment rules were modified to state that for each dollar a team surpassed the set threshold, they would pay a certain percentage of it to the taxation system. First-time offenders would pay 22.5% of the dollar while second time would pay 30% and the third timers 40%. In 2012, it was added that fourth-time offenders would pay 50% of the dollar.
In this regard, New York Yankees surpassed the threshold set for it in the years 2003 to 2016 and paid the total tax of $303.9 million. It so happens that the bigger the team, the more it surpasses the set threshold and therefore more taxes paid to the MLB. Despite the penalty charged when a team surpasses the threshold, teams, especially in the big market, do not mind spending beyond their limit for the benefit of their teams, (Sandler, 2004). Team owners might wish to stay below the threshold, but little effort is put into achieving that. It can be said that the luxury taxing might have done little to change the mindset of club owners. For poorer teams, however, the owners would love to have an opportunity where they can keep the costs down through all efforts.
The market in the baseball sport is basically of two sections, the big market, and small market teams, (Nardinelli, & Simon, 1990). The big market team is where the New York Yankees and other teams such as New York Mets and Chicago White Sox among others belong. A small market has teams like Kankas City Royals and Cincinnati Red among others. A bulk of the teams, however, belongs in the middle. The segmentation of the markets highly depends on the amount of money a team pays it players and the population size of the city in which a team belongs to, (McCormick, & Tollison, 2001). The advantage of being in a big market is that a team will enjoy more fan base which makes the profits earned from selling tickets is high, (Scully, 1995). Its simply the question of demand and supply such that the higher the fan base, the higher the demand for the tickets. Also, the teams will be able to raise the prices offered on their tickets.
Concerning the revenues, teams highly depend on the money solicited from selling tickets, (Kotler, & Armstrong, 2010). The New York Yankees since it has a high fan base, and the stadium size can only accommodate a certain number of fans, it means that when more people show up to watch a game, the management can decide to increase the prices and still manage to sell. The large sales of tickets contribute to the revenue the team makes. This money can be channeled to investments in the team while profits still being realized. The more revenue generated provides to the high payroll offered to players.
Small teams, on the other hand, are quite disadvantaged with small fan base they have. This means they are likely to generate little revenue from the sale of tickets. In the quest to increase their number of fans, small teams tend to overspend regarding what they pay their players, (Millward, 2013). They feel that by offering a high payroll, it could attract more talented players and consequently have an increase in their fan base. This is however not always the case thus these small teams lose money. They are unable to raise the crowds they wish to achieve. These teams spend their finances on paying the playing but receive no compensation for this money through the sale of tickets. It was recently reported the Miami Marlines, one of the teams in the small market struggled to play with a crowd of about 347 fans. This is quite discouraging especially for the players who put in their best but still could not raise enough revenue for their teams through the fans, (Carsrud, & Brannback, 2011).
Another strategy put in by small-market teams is by rebranding their team uniforms and stadia. A great investment is put in the acquisition of the new set of uniforms for players and setting up a stadium. For a stadium, luxury suites need to be provided, and they are the main reason why renovations and restructuring of stadia are done. For a team with little revenue and the pressure mounted on it to establish a stadium that has luxury suites to remain in the competition is quite a heavy burden on small market teams. Some of the benefits enjoyed by luxury suites owners include; having a private way to enter the stadium, food, and liquors of high standards, a chance to meet team players among others. It can be seen that small market teams struggle to have luxury suites to attract more fans to their teams especially the corporate members.
Small market teams suffer the wrath of being in the same field with high market teams. They always have to struggle to be noticed by fans, players, and the entire industry, (Walker, & Bellamy, 2008). Small market teams have to work twice as hard as big market teams to get some recognition. It is hard for partners and corporate individuals to boost the investment needed by the small teams. Players would rather join big market teams due to the high payroll being paid there. Small teams have to strain their budgets to please players with high payments which are not always sustainable. Teams like Yankees can comfortably afford high payrolls whi...
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