A Theory of Tax Effects on Economic Damages

Southern Illinois University - Carbondale Economics Department Discussion Paper No. 2013-02

21 Pages Posted: 10 Jan 2013  

Scott D. Gilbert

Southern Illinois University at Carbondale - Department of Economics

Date Written: January 1, 2013

Abstract

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.

Keywords: income stream, tax, present value, tort, personal injury, wrongful death

JEL Classification: K13, K34

Suggested Citation

Gilbert, Scott D., A Theory of Tax Effects on Economic Damages (January 1, 2013). Southern Illinois University - Carbondale Economics Department Discussion Paper No. 2013-02. Available at SSRN: https://ssrn.com/abstract=2198605 or http://dx.doi.org/10.2139/ssrn.2198605

Scott Dale Gilbert (Contact Author)

Southern Illinois University at Carbondale - Department of Economics ( email )

MC-4515
Carbondale, IL 62901-4515
United States
(618) 453-5065 (Phone)
(618) 453-2717 (Fax)

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