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NEW YORK, NY - OCTOBER 18: The Yankees have paid the luxury tax during the majority of the past decade (Al Bello/Getty Images)

The luxury tax, otherwise known as the Competitive Balance Tax, is essentially a soft payroll ceiling. The purpose of the tax is to reduce the advantage of large-market teams that can afford to spend more money. Baseball teams in smaller markets (such as the Cleveland Indians, Kansas City Royals and Milwaukee Brewers) can't afford to spend money like the New York Yankees or Los Angeles Dodgers. As a result, the latter teams can buy free agents of higher quality and in higher quantity. The luxury tax forces those teams to incur penalties if their payroll rises above a certain cap.

Upcoming Luxury Tax Thresholds (via MLB.com)

2018: $197 million

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