Definition of Soft Cap

What does the term "soft cap" mean in the world of sports? What is meant by the term "soft cap" in the sporting world?

In sports, a salary cap is a preset limit on the amount of money that teams can spend on player salaries over the course of a year.

Now, there are two types of caps - hard caps and soft caps. Today we will be talking about "soft caps".

In a "soft cap" system, teams are able to spend over the salary cap as long as they are willing to incur penalties. This "penalty" is often referred to as a luxury tax.

Definition of Soft Cap - Financial Dictionary - Sports - Illustration - Basketball, Baseball and a ChequeLet's look at a fictional league and how they might implement a "soft cap".

The USBL, a fictional baseball league, has a salary cap of $10 million.

If teams want to spend above that amount in any given season, they must pay a "luxury tax". In the case of the USBL, a 20% "luxury tax" must be paid on any dollar that is spent over the $10 million limit.

So, the big spending team in the league spends $20 million one season on salaries. This means that they must pay $2 million on top of that to the league in the form of a "luxury tax".

Both the NBA and MLB employ a "soft cap". In the case of the MLB, for instance, money that is collected from luxury taxes is given to teams in smaller markets - this is called "revenue sharing". Teams such as the Pittsburgh Pirates and Miami Marlins have received tens of millions of dollars in previous years thanks to "revenue sharing".

Under a "soft cap" system, teams can spend over the cap but they will have to pay extra to do so. Revenue sharing allows smaller market teams a better chance to compete with the likes of the New York Yankees and Los Angeles Lakers.

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