This paper presents a model of a professional sports league and analyzes the effect of luxury taxes on competitive balance, club profits, and social welfare. It shows that a luxury tax increases aggregate salary payments in the league and produces a more bal- anced league. Moreover, a higher tax rate increases the profits of large-market clubs, whereas the profits of small-market clubs only increase if the tax rate is not set inad- equately high. Finally, we show that social welfare increases with a luxury tax.
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