Shohei Ohtani’s contract is a hot topic every day. This is because of the unique form of contract that has not been seen in any previous sport.
Shohei Ohtani has decided to suspend payment of 97 percent of his annual salary of 700 million dollars. Currently, the average annual salary of MLB in 2023 is 4 million dollars.
Ohtani means that he only receives half of MLB’s average annual salary. Ohtani’s contract is complicated economically. The benefits and losses are mixed.
First of all, it is definitely a benefit in the tax sector. There is a big part of saving ‘main tax’.
If Ohtani leaves the U.S. after retirement or stays in Texas, he or she can save state taxes. Taxes in the U.S. are largely divided into federal and state taxes. Federal taxes are classified into seven categories according to income level, and the highest income tax rate is 37 percent.
The most important thing is the state tax. The state tax varies greatly from region to region. Places like Texas and Nevada do not have state tax at all. When Park Chan-ho and Choo Shin-soo chose Texas in the past, such a part was also influenced by such factors. However, California, the home state of the Dodgers, is considered one of the regions with the highest state tax. The highest tax rate reaches 13.3 percent.
When combined with federal taxes, it means that more than 50 percent of Ohtani’s annual salary will be paid in taxes. On top of that, agent fees are 5 percent.
Tax expert Robert Raiola, director of sports entertainment at PKF O’Connor Davis, a global accounting firm, revealed Ohtani’s tax history on his personal social media when his contract was announced.
According to the report, Ohtani will pay 53.75 percent in taxes on his income, including 37 percent in federal tax, 13.3 percent in state taxes, 2.325 percent in Medicare, the U.S. public health insurance system, and 1.1 percent in the state-injury and injury-inclusive (SDI). This means that if Ohtani lives outside of California (especially Texas), he or she will save 13.3 percent. That is a whopping amount of money, which is over 120 billion won. However, this cannot necessarily be considered a benefit because of the depreciation of the currency. The value of the currency is rapidly falling due to enormous inflation. A bowl of seolleongtang last year was 8,000 won, but it is 9,000 won this year. This means that the value of money is going down.
In general, when calculating player wages for the application of the “luxury tax,” the value of future salaries is lowered by applying an annual interest rate of 4.43% in accordance with the big league labor-management agreement rather than the actual salary. When calculated in this way, the present value of receiving an annual salary from 11 years later will fall to $460 million, not $700 million over 10 years. Therefore, saving tax does not necessarily mean Ohtani’s payment grace period.
In this respect, it is the LA Dodgers that benefit the most, not Ohtani. That’s why the theory that he made some concessions for the team is more convincing than the financial part.
The Dodgers paid Ohtani about $60 million instead of $700 million, but could save nearly 60 billion won in luxury taxes.
In addition, by recruiting new special players, it is possible to have the championship title. This alone can be said that the Ohtani effect is tremendous. From the Dodgers’ point of view, recruiting Ohtani is the best choice to kill two birds with one stone.
