The Effect of Luxury Taxes on Competitive Balance, Club Profits, and Social Welfare in Sports Leagues

International Journal of Sport Finance, Vol. 5, No. 1, pp. 41-51, February 2010.

20 Pages Posted: 21 Aug 2008 Last revised: 17 Feb 2010

See all articles by Helmut M. Dietl

Helmut M. Dietl

University of Zurich - Department of Business Administration (IBW)

Markus Lang

University of Lausanne - Faculty of Social and Political Sciences

Stephan Werner

University of Zurich - Department of Business Administration (IBW)

Date Written: June 8, 2009

Abstract

This paper provides a game-theoretic model of a professional sports league and analyzes the effect of luxury taxes on competitive balance, club profits and social welfare. We show that a luxury tax increases aggregate salary payments in the league as well as produces a more balanced league. Moreover, a higher tax rate increases the profits of large-market clubs, whereas the profits of small-market clubs only increase if the tax rate is not set inadequately high. Finally, we show that social welfare increases with a luxury tax.

Keywords: Sports League, Luxury Tax, Social Welfare, Competitive Balance

JEL Classification: L11, L83

Suggested Citation

Dietl, Helmut M. and Lang, Markus and Werner, Stephan, The Effect of Luxury Taxes on Competitive Balance, Club Profits, and Social Welfare in Sports Leagues (June 8, 2009). International Journal of Sport Finance, Vol. 5, No. 1, pp. 41-51, February 2010. , Available at SSRN: https://ssrn.com/abstract=1237737

Helmut M. Dietl

University of Zurich - Department of Business Administration (IBW) ( email )

Hottingerstrasse 10
Plattenstrasse 14
Zurich, 8032
Switzerland

Markus Lang (Contact Author)

University of Lausanne - Faculty of Social and Political Sciences

Quartier UNIL-Centre
Synathlon
Lausanne, 1015
Switzerland

Stephan Werner

University of Zurich - Department of Business Administration (IBW) ( email )

Hottingerstrasse 10
Plattenstrasse 14
Zurich, 8032
Switzerland

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