A Taxonomy for the Treatment of Taxes in Cases Involving Lost Earnings
Format of Original
American Academy of Economic and Financial Experts (AAEFE)
Journal of Legal Economics
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.