The paper is based on few terminologies related to sports. The aim of this paper is to give a brief on salary cap and luxury tax. In this paper we will discuss about the salary cap for 2014 – 2015 season and Larry Bird Exception. The difference between salary cap and luxury tax will also be determined .
A limit of amount spent on player’s contract which binds a team to spend more is called a salary cap. Salary cap is implied to have a competitive balance in the teams participating in the league. The salary cap and luxury tax are not available for 2014 – 2015 season as it is to be released soon. The bi-annual exemption (BAE) is $ 2,077,000 and the minimum salary for 1 year is $ 816,482 in the 2014 m- 2015 season. In this season tax has been changed to an incremental system and will be assessed at different levels. In this season the total tax will not be distributed among the teams with low payrolls as it was done in past. From this season only 50% of the revenue generated from tax will be received to the teams which did not cross the cap. In the new agreement nothing is specified about the remaining 50% of the tax .
In the 2014 – 2015 season, mid level exception has been made which allow the teams to go over cap and sign one player minimum per season. Any team which exceeds the cap by $ 4 million or more will not be allowed to receive player in sign and trade deal .
Larry Bird Exception is named after the former Boston Celtics who was associated with the team until his retirement because of a provision. The provision was ‘soft cap’, in which the teams were allowed retain the rights to an existing player and exceed the cap. This provision is also known as the Larry Bird Exception. The reason of this exception was because of the fans which were disappointed because of frequent shifts of the players to other teams. It gave advantage to the player’s current team over other teams to retain a player without agent negotiations .
Luxury tax is applied in professional sports especially in Major Baseball League (MBL). The league determines a set of guideline level of aggregate payroll. If any team participating in the league exceeds the limit of payroll it is charged by the luxury tax to the extent by which it exceeds. It is technically called the “Competitive Balance Tax”. It is a punishment or a fine that a team has to pay for exceeding the determined amount of payroll. It is done because of the competitive balance in the teams. It is quite similar to the salary cap but MBL does not have a salary cap and applies luxury cap on the teams who do not abide the rules .
In MLB only luxury tax is applied while in NBA both salary cap and luxury tax are applied. The main difference between salary cap and luxury tax is that the salary cap gives a benefit to the team to avail Larry Bird Exemption and retain a player even by exceeding the cap and there is no such provision available in the luxury cap .
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