A Theory of Tax Effects on Economic Damages
Scott D. Gilbert
Southern Illinois University at Carbondale - Department of Economics
January 1, 2013
Southern Illinois University - Carbondale Economics Department Discussion Paper No. 2013-02
This paper provides a theoretical statement about the effect of tax on the present value of lost income streams. I consider the simple case of flat tax rates on earnings and interest income. I approximate tax effects via the instantaneous rate of change - in present value – when the tax rate goes from zero to a small positive number. In this setting I show that present value is lower before tax than after tax when the earning stream is short, with the reverse outcome holding when the earnings stream is long. The switch point, where the tax effect goes from negative to positive, depends on the theoretical model’s inputs. I characterize the effect of inputs on this switch point, and illustrate via an example of an injured railroad worker’s claim of economic damages.
Number of Pages in PDF File: 21
Keywords: income stream, tax, present value, tort, personal injury, wrongful death
JEL Classification: K13, K34
Date posted: January 10, 2013
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