As reported by ESPN, the New York Yankees have signed Masahiro Tanaka to a 7-year contract worth $155 million, earning an estimated $22.1 million per year. According to ESPN, Tanaka's contract is the largest ever for an international free agent and the fifth-largest deal for a pitcher. However sweet this $155 million dollar deal seems, the reality is that Tanaka will lose almost $90 million over the 7-year life of his contract with the Yankees.
In addition to the Yankees, Tanaka was also being courted by the Arizona Diamondbacks and the Chicago Cubs. Unlike New York City, the cities of Phoenix and Chicago do not impose a city income tax. Had Tanaka chosen a similar contract with the Diamondbacks or the Cubs, he would have saved almost $12 million over the life of his contract. Instead, Tanaka chose New York, where the state and local rates are some of the highest in the country. By choosing to sign with the Yankees, Tanaka automatically forfeited almost $12 million in taxes that would have been saved had he signed with the Cubs or Diamondbacks.
Tanaka will pay a combined marginal income tax rate of 56.1 percent - over half of his contract. For New York state and local taxes alone he will lose an estimated $2,811,257 a year. The combined marginal income tax rate Tanaka will pay is comprised of the federal, state and local tax rates, plus the Medicare payroll tax. The chart below shows Tanaka’s tax burdens as compared between the differing franchises.
Est. Federal Tax Burden
Est. State Tax Burden
Est. City Tax Burden
Total Tax Liability
The Federal Income Tax Burden listed above is comprised of the 39.6 percent tax bracket and 3.8 percent Medicare Tax. For illustrative purposes, the marginal combined tax rate of 56.1 percent (which includes Federal, State, Medicare, and Local tax rates) is applied only to his contract salary and does not take into account his bonuses, endorsement, and other sources of viable income.
While Tanaka is not your average employee, the real lesson to be learned here, one you won’t see in the headlines is that higher federal and state tax burdens can have a huge impact on employees and employment in a state. The sweetness of signing a $155 million contract to play baseball for one of the leagues most renowned teams, the New York Yankees, is only made bitter by the fact Tanaka will have to settle for receiving only $68 million (less than half) of the $155 million contract due to the heavy federal and state tax burdens.