Earlier this month, right after being sworn in as a member of Congress as the representative for New York’s 14th district, Alexandria Ocasio-Cortez went on “60 Minutes” and floated the idea of a 70% top marginal tax rate for earners over $10 million. The idea had billionaire Michael Dell harrumphing at Davos, only to get a clapback from MIT professor Erik Brynjolfsson that was worthy of Ocasio-Cortez herself.
“Name a country where that’s worked – ever,” Dell said.
Replied Brynjolfsson: “The United States.”
The top tax rate in the U.S. was 70% or higher from 1936 through 1980, a time during which – at least once the Depression ended – the American economy did do rather well. For most of that time, the threshold for the highest bracket was $200,000, or $400,000 from 1948-64.
If you were a professional athlete in the days of the high-rate top brackets, this hardly came into play for you at all. Exactly zero Major League Baseball players cracked a $200,000 salary until Dick Allen in 1973 was appropriately compensated for his ability to smoke while juggling. The next year, when his wages went up to $250,000, Allen became the first player to pay the IRS at the maximum rate.
These days, pretty much every major leaguer pays the top rate of 37%, as the league minimum last year was $545,000 and the top bracket starts at $500,000 for single filers and $600,000 for married couples. What that means, though, is that Michael Conforto, making $605,094 with the Mets last year, paid the same tax rate as his teammate Yoenis Cespedes, who made $29 million.
If and when Ocasio-Cortez gets her way, it will have the effect of re-stratifying the tax rates paid by ballplayers, harkening back to the days when Allen was at the top of the heap and the minimum MLB salary was $15,000, or $80,000 today adjusted for inflation.
The proposal to restore top tax rates on eight-figure earners to pre-Reagan levels is popular enough to believe that it has a future, if not for a couple of years. What that means is that things are going to get more complex at the top of the free agent market in baseball, as well as other sports.
“The guys who will be really affected are those in the $20M+ range which are only a handful per offseason,” Rafael Nieves, vice president for baseball at the Wasserman agency, told Dealbreaker in an email. “It will impact those guys, but not the rest.”
As far as their own contracts go, that is true, but it certainly is possible to see how changes at the top of the market could reverberate through the rest of free agency, and really to all player salaries. That especially is true if changes to the tax code lead to changes in the way those top players do their contracts, impacting team budgets long after their careers are over.
“You will see guys deferring money for many years,” Nieves said.
That already happens, most famously with the million-dollar payments Bobby Bonilla gets every July 1 from the Mets, and will continue to get until 2035. But starting in 2022, Bonilla’s cash-in at the start of July will be dwarfed by Max Scherzer, whose contract calls for him to receive $35 million from the Washington Nationals for each of the next three seasons – all of which will be deferred to 2022-28, with $15 million due each summer. (Don’t worry about Scherzer’s short-term finances, he’s already banked $60 million on his current deal, and gets $15 million of his $50 million signing bonus each of the next three years after getting the first $5 million up front.)
If deferrals become more common, it’s a dangerous game for players as a group, because teams will have a built-in excuse to keep salaries lower, seeing all the money they already have budgeted for years down the line. At the same time, a much higher top tax rate could have a dampening effect on top salaries – when the difference between $20 million and $25 million is only effectively $1.5 million, chasing every last dollar becomes somewhat less important. If that becomes the case, it should mean more money for players lower on the salary spectrum, right? Not if the owners have anything to say about it, of course, but that part of the distribution of wealth in the sport could be another wrinkle in what figures to be a very tense round of collective bargaining in 2021.
“It’s probably unpredictable as you just never know how the market is going to react and what other factors will be in the air,” Nieves said. “I do think that if we see lower salaries at the top, we won’t see an increase of pay at the bottom. Unless clubs have a spending floor, they will never be motivated to really allocate their money into the lower classes.”
The only way to a spending floor is a salary cap, long anathema to the MLBPA, but given that players’ share of league revenues has gone down in the current “free” market in which the luxury tax acts as a pseudo-cap, and players in sports with salary caps are earning more on a percentage basis, it might just be their best way forward.