What are the general effects of a tax or of revenue sharing?
A very high tax rate, as in the owners’ earlier tax plans, would have the same effect as a cap. Consider the example in the section on the cap, but now assume that the Tigers are over the limit and subject to a 100% tax rate on any increase in their payroll. Thus, if the Tigers want to sign the player for $2M, they would pay an additional $2M in tax, for a total cost of $4M to make an offer of $2M. Meanwhile, if the Yankees are under the limit, they could offer $3M to the player at a cost of only $3M to the team. This would make it almost impossible for teams which are in the high tax range to compete for free agents, but not completely impossible as a cap would. If the Tigers really want to keep the player, they can offer $4M and pay an extra $4M in tax, but they would expect to lose a lot of money by doing this. A lower tax rate will reduce salaries but not prevent teams over the limit from competing. For example, if the tax rate were 11% rather than 100%, the Tigers could offer $3.6
