In the major American sports leagues, there are three leagues, the NHL, MLS, and the NFL, to which there are hard salary caps on player salaries, which means of course, that payroll for players cannot exceed that amount of money which has been contractually agreed upon, period. This means that having a hard salary cap in those sports is great for the owners, and unfair to the players, since it limits the players in receiving what the market will bear for their services. In the NBA and MLB there are no hard salary caps, instead, they have put into place, a luxury tax, which if the nominal salary cap is exceeded, a penalty is assessed to each team that exceeds that cap in salaries. As you might expect, the luxury tax is a fairly recent invention, beginning in 2003 in baseball, and 2002-03 in basketball, to which, it is stated that the purpose of the cap is to assure greater parity in their respective sports, which sounds egalitarian and almost fair, but as expected, hides the real truth of the matter.
The thing is, if a luxury tax in a given industry or a salary cap for that matter seems like a good and fair business practice, why is it, that there aren't any luxury taxes on labor whatsoever on some of America's biggest multi-national conglomerates such as Apple or Microsoft or ExxonMobil? The reason that there isn't a luxury tax on these entities is that it doesn't make any sense as nobody is putting a gun to anybody's head, insisting that so-and-so Manager or CFO or whatever, must have a certain salary, as pretty much, these companies compensate the people that work for them, what they feel or what has been approved through the Board of Directors or management as fair and reasonable in their employment compensation packages.
The bottom line for sports is that there should not be an arbitrary salary cap or luxury tax applied when it comes to player's salaries, rather the players should not be limited in receiving what is fairly due to them for providing the sports entertainment to begin with. The whole purpose of the luxury tax is basically to protect the owners from "overspending" on labor, and thereby to in aggregate, improve the bottom line for them and them alone, in a given sport. This is a great deal for the owners, but an unfair one for the players of the sports, to which their careers can end or be terminated at any moment, with little or no possibility of ever being able to command the type of salary that they have received by playing their particular sport, outside of that world of sports.
The issuance of salary caps with or without a luxury tax is in reality, a form of legal collusion by the owners against the players; despite the way most media outlets try to spin it. To say, that the purpose of a luxury tax is to create a level playing field is senseless, since the payroll for a team in NYC as opposed to Milwaukee, should not now or ever be close to the same amount, as the media and advertising rights, the wealth, and the overall worth of NYC is second-to-none, and thereby the salaries of NYC players should naturally be appreciably higher.
The luxury tax is in essence, a way for billionaire owners, to protect themselves from themselves, at the expense of the real value of the labor that makes the sport to begin with.