Why a luxury tax would cause financial chaos in the Premier League

When a senior football manager floated the idea of ​​introducing a “luxury tax” in the Premier League, he just shook his head.

The modern history of football has probably been a series of short-sighted decisions, but this one was seen as the most short-sighted of all. This is even more true when you consider the context in which the idea arose.

Premier League clubs are discussing a luxury tax because they are unhappy with current profit and sustainability rules. There is an assumption that point deductions are not what the rules are intended for and that they inhibit growth.

A luxury tax would instead allow clubs to invest but then only pay a penalty if they exceed spending limits.

The growth arguments are actually to the point in their principles and it is good that the Premier League is discussing all of this. It has long been a worrying fact that the current system favors those who earn the most while calcifying the rules of the game. This is wrong and not what football should be about.

It’s just that the clubs are constantly focusing on the wrong issues when dealing with this.

The problem is not the cost control rules. It should be clear by now that football needs strict financial regulation. Since there is a 90 percent correlation between payroll and performance in the league, and the lifeblood of competitive sport – particularly when it generates commercial returns – is competing, this means that the incentive to spend more is always there. Without restrictions there is always a risk that clubs will spend more than they can afford.

This is exactly what happened to Leeds United at the turn of the millennium. That is why such rules were introduced. The mere fact that so few European clubs have gone bankrupt in the last 14 years is proof of the success of Financial Fair Play.

Chelsea could be forced to sell homegrown players to comply with profit and sustainability rules (AFP via Getty Images)

So the problem isn’t the rules.

The problem is the system in which they sit.

It is not FFP or PSR, for example, that keeps the big six at the top. It’s the fact that the big six make so much money in a self-sustaining financial system. The answer is to change this system, not to remove key cost controls.

Instead, clubs want to go in the other direction and promote “investment”.

This is already questionable when you consider that football makes more money than it knows what to do with.

The Premier League generates billions every season. It pays £2 billion more in wages than any other domestic league. If there’s one thing it doesn’t need, it’s more money. In fact, more money tends to lead to more problems and more gaps. This is exactly what actually happened in the Premier League. The financial gap between top and bottom is more than twice as large today as it was in 1992/93. More money is concentrated in fewer clubs, which consequently win a higher proportion of points than the richest clubs three decades ago. It was a long process of concentration that only ever goes in one direction. Manchester City is the best example of this, winning more trophies, games and points in six years than any English club has ever managed in the same period.

John W. Henry oversaw an efficient transfer strategy at Liverpool (Getty Images)

So what the Premier League actually needs is not more money, but more money redistribution.

The main argument behind a luxury tax is that it will do exactly that. And sure, it might redistribute some money. However, that would only be a part of a much larger number. Every tax is always divided by 19 anyway.

Because of this, it would have exactly the opposite effect than intended and would actually inhibit growth while increasing risk.

Think about how it would actually turn out.

The wealthiest owners could simply spend whatever they wanted. Sure, the “tax” qualifies as a penalty, but it’s not really a penalty if the owners want to actively spend money. This is particularly the case with sovereign wealth funds, high-ranking members of the royal family with access to immense state assets and capitalist funds worth tens of billions.

They could just keep paying the “tax” and keep spending.

What would actually happen is that transfer fees and wages would rise while everyone else would have to spend more and more to keep up. Not every owner would be willing or able to do this. When it comes to the kind of scale at which private equity funds or sovereign wealth funds operate, almost no other owner would.

When that happens, there are only two long-term outcomes. One is that two or three of the richest owners would win absolutely everything and no one else would be able to compete. The other thing is that other clubs would spend so much to compete and end up going bust, or their owners would eventually lose interest.

Newcastle is frustrated with the profit and sustainability rules (PA wire)

It was precisely the latter that made the introduction of Financial Fair Play necessary in the first place, albeit on a much smaller financial scale. Leeds United did not have a comparable wage bill to Premier League clubs now.

And in this context, one should remember that this is not just about competition. Jobs and social institutions are at stake.

A luxury tax would make the entire football economy dependent on who buys your club. Everyone would need an owner who can ultimately compete with the richest owner. This is not a model for a sustainable football economy. It is the backdrop for financial chaos and a broken sport.

This situation does not bring “growth” or satisfy “ambition”. It exacerbates the very problem they are trying to solve.

Even UEFA has long since recognized this. The European association has not been a model of regulatory excellence in recent years and has recently been increasingly under the influence of the European Club Association led by Nasser Al-Khelaifi. Despite this, and although the PSG president himself had previously brought up a “luxury tax”, UEFA rejected the idea because they recognized that it would lead to exactly these problems; that the richest could simply continue to pay the tax.

Premier League members have instead alerted American sport to how the “luxury tax” works.

But they are completely different models. In American sports there is a literal redistribution of talent in the form of drafts as well as much stricter financial controls. They also cannot be owned by sovereign wealth funds or private equity funds.

Transporting the luxury tax would mean adopting only a single measure where it could not possibly have the same effect because it is located in a different system.

The Premier League needs to find a completely different solution.

A luxury tax would be the most short-sighted measure of all.

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