The baseball finance rules that could solve F1's problems

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F1 teams can't agree how to cap the huge costs of racing, but baseball's luxury tax could be the answer the sport is looking for.

Owning an F1 team is expensive. The bare minimum needed to go racing each year is $100m, with up to another $200m spent by the big hitters as they eke even more out of their cars.

In the bygone days of huge tobacco sponsorship and manufacturer backing, this wasn't so much of an issue. But with cigarette advertising banned and the global recession forcing BMW, Honda and Toyota to withdraw their factory teams F1 is now in a financial black hole - and struggling to find a way out.

One regularly mooted idea is a budget cap, but it's not a popular option among teams who have serious backing.

“I've always been opposed to a budget cap,” said Red Bull boss Christian Horner last week. “I don't believe it's the correct way to control costs.” Instead, he asserts that the way to do so is by allowing teams to buy more parts from each other.

“If we were to open up – not customer cars, but allow teams to buy more components from each other – it would save the necessity for little teams to invest in huge R&D departments,” he said.

For Horner, this reasoning makes sense: Red Bull Racing are not a “little team” and would be on the supply rather than demand end of selling components. It's also against Red Bull's interests to cut their spending just so the likes of Caterham and Sauber can be more competitive.

To purists, though, increasing the sale of technology from one team to another would be seen as going against the spirit of the sport. After all, F1 is not a single make series. It is as much an engineering competition as it is a racing one, with each set of engineers charged with building the quickest car they can within the constraints of a rulebook, and being able to simply buy a better engineered car rubs against the grain. 

However, there is a way which will allow the big budget teams like Red Bull, Mercedes, and Ferrari to spend whatever they want while helping smaller squads to keep up without risking bankruptcy.

Of all places, it's an idea from baseball.

Like all major American sports leagues, Major League Baseball has a salary cap which puts a limit on what each team can spend on their roster. However, it also gives its teams flexibility by way of a luxury tax, which allows them to spend over that amount if they pay a premium.

Only three or four big-market teams from the league of thirty ever break it, although the New York Yankees are serial offenders. However, that's the beauty of it: the Yankees can afford to break the tax and so they do, paying for big name stars to cement their position at the top of the league.

The financials of the luxury tax are a headache, but essentially teams who spend more than the salary cap must pay a percentage of the amount they are over back to the league. The more teams spend, and the longer they spend over the limit, the higher the percentage.

Although you couldn't do a straight copy-paste onto F1 from MLB, the concept could be what the sport needs to pull itself out of its financial black hole.

If we take the widely accepted $100m figure as the minimum to put together a midfield F1 team – car, personnel, drivers, engine, the lot – then add twenty-five percent wiggle room, you could say that the lofty F1 budget cap is $125m. Obviously, this number is arbitrary, as all of the maths is at the moment, but what's important is the concept.

So, we will say that the average cost, plus a little bit more, is $125m. But what if Red Bull want to spend double that, $250m, on the development of their car each year? Then follow the luxury tax theory and assess them a financial penalty for going over the limit.

The penalties could be lax at first, say 10% of the overspend for the first $10m, getting steeper the more a team overspends, with everything upwards of double the limit being charged at sky-high rates.

This would allow the well-heeled teams to spend what they like, but also create a cash pool which can be redistributed down the grid, easing the financial burdens of the teams who don't have billionaire owners and manufacturer backing.

It would help the teams that can't afford to develop their car to the extent that the leaders can by giving them money to invest in it. 

It would also give F1 a chance to put easy financial incentives in place. Running a Friday practice rookie? Have a boost in what you can spend tax-free. Running young talent as opposed to career back-markers (I'm looking at you, HRT in 2012)? Have some more money to spend. Running a university internship programme that'll benefit the sport? Cap break.

You get the idea. By instituting a luxury tax, it gives those who have the desire and means to spend more the ability to do so without leaving the rest behind, as your overspend will give them the ability to research more. At the same time, the tax penalties at the top will stop teams from just buying success.

There are problems with any spending cap in F1; teams are reluctant to open their books, and at times won't have any idea what they spent on this year's specific car. After all, development is fluid year to year. Nailing down costs which can be verified would be a monumental challenge, and the FIA would need a team of accountants at each factory to ensure fair play.

However, the idea of a soft spending cap with a luxury tax will give F1 teams both a cost ceiling to work to, and a way to ensure that the poorly-backed teams aren't left behind by their big-spending rivals.