A Taxonomy for the Treatment of Taxes in Cases Involving Lost Earnings

Document Type




Format of Original

16 p.

Publication Date

Fall 1996


American Academy of Economic and Financial Experts (AAEFE)

Source Publication

Journal of Legal Economics

Source ISSN



There are 4 possible methods of handling taxes in calculating lump sum awards in cases involving lost earnings and earning capacity: 1. the after-tax earnings and after-tax discount method, 2. the pretax earnings and pretax discount method, 3. the pretax earnings and after-tax discount method, and 4. the after-tax earnings and pretax discount method. From an economic perspective, the appropriate method of handling taxes depends upon the objective to be achieved, and also upon the tax treatment of the lump sum award itself. In cases where awards are exempt from income taxes, the compensation objective requires that awards be calculated taking account of the fact that both earnings and interest on the lump sum are subject to taxes.


Journal of Legal Economics, Vol. 6, No. 2 (Fall 1996): 1-16. Publisher Link.