In place of a salary cap, the competitive balance tax regulates the total sum of money a given team can spend on their roster.
Therefore, teams with greater funding or revenue would possess a competitive advantage in their ability to attract top talent via higher salaries.
Currently, the luxury tax increases based on the number of consecutive seasons above the CBT threshold, but this was not always the case.
"[1] In addition to the luxury tax, teams also must pay surcharges for exceeding certain thresholds starting with the 2016 CBA.
The primary goal of the CBT is to encourage a competitive balance amongst teams while allowing big spending on players.
A primary source of conflict leading up to the strike was the tremendous power club owners had over the salaries of players on their respective teams.
This resulted in a compromise in the Collective Bargaining Agreement of 1996, which imposed Major League Baseball's first luxury tax.
A quarter of the remaining proceeds, with accrued interest, will be contributed to the Industry Growth Fund and used for the purposes set out in Article XXV.
The last quarter of the remaining proceeds, with accrued interest, shall be used to defray clubs’ funding obligations arising from the Major League Baseball Players Benefit Plan Agreements.
Half of the remaining sum is then used to fund contributions to MLBPA players’ individual retirement accounts.
The other half of the remaining sum is then distributed by the commissioner to payee clubs that have grown their non-media net local revenue over a multi-year period.
That increasing incremental penalty can affect a team's decision regarding whether to retain a key player when they are already over the threshold, as they may be averse to paying a substantial fee.
According to FiveThirtyEight's Noah Davis and Michael Lopez, despite the new system, cash buys more wins now than it did in the past.
[26] The first obvious impact of Major League Baseball's luxury tax is that it artificially deflates player salaries relative to the open market, which may increase owner profits.
The paper develops a game-theory model that addresses the effects of a luxury tax on competitive balance, team profits, and social welfare.
In other words, the paper argues that total player salaries across the league are counterintuitively increased by the system.
In the union's view, the luxury tax system is fundamentally designed to limit the earnings of players by functioning as a stealth salary cap.
Because MLB finances are kept secret from the public and from the MLBPA, it is impossible for outside observers at this time to confidently assess the full impact of the tax system on players, teams, owners, or fans.