A soft cap system is the type of salary cap system used in the NBA. A soft cap system places a limit on how much money each team can spend on all of their players while allowing teams to go over that limit by issuing exceptions and requiring teams to pay a luxury tax. The exceptions and luxury tax are negotiated in the Collective Bargaining Agreement between the players and the owners.
In the old CBA, the luxury tax was dollar-for-dollar tax for each dollar spent over the salary cap. For example, the salary cap for the 2012-12 season is a little over $70 million. If the Lakers spend $100 million on players, they will have to pay $30 million in luxury tax. The current CBA has a new formula for the luxury tax which increases the base tax to $1.50 per dollar over the cap, and increases that amount depending on how far over the cap the team is. Furthermore, repeat offenders will have to pay an even higher luxury tax of at least $2.50 per dollar over the cap. In order to avoid paying the luxury tax but still go over the soft-cap, teams use one of the many exceptions available to them, such as the mid-level exception.