How taxes on millionaires could save the NBA

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March is heaven for basketball junkies. The NCAA tournament goes full-tilt boogie and for fans of the pro game, playoff jockeying intensifies into overdrive. As a member of the latter camp whose team sits atop the NBA East, there is a river of joy flowing through the ventricles of my pumping heart.

But this year, the happy is tempered with the specter of dread. In July, the NBA's collective bargaining agreement expires and it is a near certainty that there will be a lockout. Despite a projected revenue increase of anywhere from 3-5% in this allegedly recuperating economy of ours, the owners will padlock their doors shut, terminating contracts they signed in supposedly good faith, because they claim that they lost $370 million last season (the union disputes this). Who loses ultimately is the game itself--fan goodwill can only bend so far.

There's plenty of blame to go around, but ultimately all of it rests with the owners who flout their own salary caps with ridiculous deals to borderline players like a Hedo Turkoglu or a Rashard Lewis, as well as the talent dilution in having teams in exotic locales that can't support them (e.g. The Memphis Grizzzlies and the soon to be in Anaheim Sacramento Kings). But much of the issue of inflated salaries comes back to the same problem that is plaguing the entire economy--low taxation on the very wealthy has priced the NBA out of profitability.

Suppose the 91% tax in place during the 50's was reinstated for people making over 10 million dollars a year (it used to be over a million to be in that bracket, let's adjust for inflation). Why would a player demand a salary of 20 million a year (or Kobe Bryant's 24M escalating to 32M due next year), when the net wouldn't exceed 11M? Makes no economic sense. A GM can offer a ten year deal at 99M instead of 5 years/20M, same amount of money (not counting bonuses, endorsements and the like).

What low tax proponents never ever grasp is that lower taxes on the top 1% inevitably lead to these situations, the NBA is a micro in the macro of Wall Street, CEO compensations, estates. When massive amounts of money accumulate with the few (even hard earned, no one can deny the skill and work ethic of a LeBron or a Ray Allen), the ripple effect is that the system cannot sustain--the fans will not pay higher tickets and greater merchandise charges forever. The players and owners have effectively killed off the golden goose--let's take the ax from their hands with reasonable taxes from now on in ours.

Johnny Angel Wendell  is a talk show host at KTLK AM1150 in Los Angeles, webcaster at sfbg.com and a 30 plus year veteran of the American music scene.
 

Comments

Why do liberals always think they are simply entitled to whatever amount of other peoples' money they desire?

Posted by Scott on Mar. 15, 2011 @ 2:33 pm

Why do people that will never see a fraction of the money being talked about defend multi-millionaires to their dying breath, even though said multi-millionaires demolished the world's economy not three years ago?

Posted by paul patterson on Mar. 15, 2011 @ 2:43 pm

There are sure better ways to spend the money than basketball. How about schools?

Yes, tax the million/billionaires.

Posted by Guest on Mar. 15, 2011 @ 3:34 pm

A couple of things

First while I do love basketball (Go Bulls! Rose for MVP!), I'm not sure the sport would see that much benefit from a 90%+ tax bracket (at least where the players are concerned). When we're talking taxes, at least where the income of management/owners are concern, what we're really talking about asking is how much of the money will stay in the business? Lower taxes, history shows, simply spurs those at the top to take out more of their own business, versus putting in. And why not? Capital should always goe where it can get the most return, well that's the plan but not always the case.

A privately-held company will earn $X, after expenses and meeting other liabilities, it has four choices: re-invest the money back into the enterprise, invest the capital into new investments outside the enterprise, or distribute the cash to it's shareholders. The first two will depend on various factors, like taxes, but it always comes back to the main question at hand. If the business can garner a better return relative to investing outside the company, then that's what they'll do. This could be either investing in another company or in government debentures or what have you. Yet, if both options are poor prospects, we're already said it could distribute it back to shareholders, but there is that fourth option, holding cash or cash equivalents. But of course this is where taxes come in.

When we had that mythical 91% bracket, that marginal rate along with the preceding ones below it had a massive amount of loopholes. The vast majority had to do with plowing the money back into a business. You ever wonder why those on the right keep bringing up JFK's tax breaks? How, as the claim goes, he lowered taxes and thus brought in more revenue for the government? Well, while a lower rate would marginally generate more interest on taking trying to make more money, in reality it was because the vast majority of the loopholes were closed.

Look at it this way, prior to the JFK tax cuts, would you sooner take the money out of your business and buy yourself that swanky new Caddilac and pay the hight rate? Or, would you have your business invest in new capital, which in this case was a swanky new Caddilac (for meeting with clients of course!) and avoid the tax? Stuff like this was done all the time. While on paper the wealthy didn't get outrageous payouts because of the high tax, in reality the tax code back then only allowed them to shield their lifestyle through other means. You didn't really think the government was collecting 91%, did you?

Only those who didn't know how to "game the system" couldn't get away with it. There is a popular story Ronald Reagan, of all people, tells that started getting him more into politics. At the time he was still a B-actor, but still earning some nice money. Apparantly one year he had reached the limit before those higher marginal income tax rates started to take into effect. He gets a call from his agent saying that they got some new roles for him to play. Reagan's accountant did the math and gave Ronny the bad news, so he turned down the parts and took the rest of the year off.

So what the hell does this have to do with basketball? Well, everyone above a certain pay can take advantage of tax shelters. But some can more than others. Now I'm not sure how JW's new 91% rate would be, but if it's like the old one, then there will be a bunch of loopholes for business "investment." The teams, for example, could be regarded as corporations, and the players as "investments." Of course, here's where the rub comes in. The players themselves would have very little avenues to defer income, and would be in a similar situation that Ronald Reagan was in. So what would happen is that the players would find themselves with a salary cap not imposed by the NBA but by the IRS.

Of course, the players' agents could come back and say that part of the compensation would be shares in these clubs. But of course we're back to distrobutions of income and the players would find themselves in that same dillema unless they shifted those funds into tax-deferred vehicles. I know I'm oversimplifying this, and those who have better tax knowledge than I can better elaborate. But you get the gist of what I'm saying here with regards to that marginal tax rate and basketball.

Posted by Johnny Venom on Mar. 15, 2011 @ 7:16 pm

Has any of you readers or writers heard of UK Uncut? It's an exciting movement in Britain that exposes wealthy tax dodgers and makes them pay up so that social programs are not cut. It's very commonsense and effective. Turns out many low-paid workers pay more in taxes than billionaires (who essentially pay none!). School and housing programs are cut because there isn't enough money. However, if the obscenely wealthy would only pay their share, no such cuts would have to be made.
This movement was described by Johann Hari 2/21/11 in The Nation, in an article titled "The UK's Left-Wing Tea Party." Though the last 2 words are usually enough to put me off a bit, I was very glad to have read the article and highly recommend it. We can do this here!! In fact, I believe "US Uncut" already exists, so Americans can take action too!
Our economic problems are all not due to not enough money, but to too much money being held by too few, and too much money spent uselessly (e.g., have the problems engendered on 9/11 been resolved at all?). And it's not just billionaire people who don't pay their share--plenty of corporations are failing to pay taxes, too. Yet they have taken billions in bailouts (B of A), and make billions in profits every year (Exxon).
So read The Nation article, join a US Uncut protest near you, and let's get some money back where it belongs. The wealthy will still be plenty comfortable, yet the US "deficit" can be reduced. Such common sense!

Posted by Guest on Mar. 16, 2011 @ 9:33 am

Um, even with diminishing marginal rates of income as salary increases, why would a player take 5 years of wages over 10 years when there's the possibility of getting all the money in 5 years and then signing another contract?

Posted by Guest on Mar. 16, 2011 @ 1:36 pm