Have A Holly, McConnelly Christmas

Today Henry Abbott of ESPN/Truehoop attempts to analyze the effect of this week's federal tax deal upon the NBA. To quickly review the proposed tax deal, the lower income tax rates (compared to Clinton-era rates from the 1990s) passed in 2001 will be extended for 2011 and 2012. Prior to this proposed deal between President Obama and Republicans, U.S. income tax rates were scheduled to rise to Clinton rates effective January 1st, 2011. Additionally, under this proposed deal, long-term capital gains tax rates will be extended.

In a couple posts and yesterday, Abbott suggests, citing some extremely crude analyses, that the tax savings for owners and players associated with this week's federal tax deal could amount to $160 million, one-fifth of the supposed $800 million aggregate deficit suffered by owners in 2009-10. (Some of that savings consists of reduced tax liability on player salaries, but presumably the equilibrium wage paid to players could thereby be lowered, because they could then take home more of their gross wage, and thus owners could realize those savings.)

However, the flaw in Abbott's analysis is that the $800 million deficit was incurred under the 2010 tax regime — which will also be the 2011 tax regime, under President Obama's proposals. The supposed $160 MM savings are not really "an infusion of cash from a third party", as Abbott frames it, but rather the avoidance of what would've been a withdrawal of cash from the NBA pot, had Bush tax rates been allowed to rise to Clinton tax rates in 2011. If economic conditions in 2009-10 are held constant for 2010-11, then the owners should still be running an $800 million deficit, because the federal tax liability will be the same.

The bottom line is that the Obama tax deal will be nice for owners, but only because it avoids a hit. It does not improve their economic position compared to the 2010 situation, and thus it does not bring the owners any closer to the NBPA in ongoing labor negotiations. And if you believe in Ricardian equivalence, the "savings" from the avoided tax hit is all funny money anyway.