Final answer:
The question explores the difference in tax treatment of salaries within sports and corporate sectors, highlighting that athletes can deduct their full salary, while corporations are limited in deductions for executive pay. Athletes are noted to pay 40% in taxes and save one-third of their after-tax income, which has economic implications compared to local business owners with different tax rates and MPC.
Step-by-step explanation:
The question at hand deals with tax deductions on salaries in different sectors, specifically contrasting the full deductible salary expense of a baseball player with the limited deductible salary expense of a CEO like that of IBM. The taxation rules differ significantly between sports professionals like athletes and corporate executives. While a baseball team can deduct the entire multi-million dollar salary of a player, corporate entities face limitations, often restricted to just $1 million of deductible compensation for their executives. This difference in tax treatment can have sizable implications for business finances and tax strategy.
Understanding tax implications for high earners is crucial, especially for those like professional athletes who have relatively short careers but high earning potentials. As explained by Siegfried and Zimbalist, a significant portion of an athlete's marginal income, let's say 40%, is earmarked for taxes. Athletes then save a considerable amount of their after-tax income, assumed to be one-third. This contrasts with other local business owners who may pay a lower tax rate, such as 35% of their marginal income, and have a different marginal propensity to consume (MPC).