Tax Filing Status Change and Economic Loss in Cases of Wrongful Death
Anderson, Gary A., Journal of Legal Economics
Current practice and statutes limit the assessment of loss of support in cases of wrongful death to the earnings of the decedent. Adjustments to earnings may include exclusions for taxes, personal consumption, and savings which accrue to a separate assessment of net accumulation to the estate. There is no direct consideration in current practice or statute to the economic loss of future support to the surviving family members resulting from the future increased tax liability on the surviving spouse's earnings. This increased tax liability results from the change in tax filing status from joint to head-of-household or single and the loss of one personal exemption. This research examines the economic consequences associated with a change in tax filing status and loss of one personal exemption as the direct result of a wrongful death involving a surviving spouse with taxable income.
The literature and some courts have been clear in their decree to value the loss of aftertax earnings of the decedent at an aftertax interest rate (Norfolk and Western Railway Co. v. Liepelt 1980; Jones & Laughlin v. Pfeifer 1983; Schieren 1994; Harris 1994; Albrecht 1994; Aalbers, Clauretie, and Jameson 1994; Bell and Taub 1994; et al). The inclusion of tax adjustments to both the decedent's earnings and the discount rate have not, however, been universally accepted by either the courts or the expert economist. Several states and many economists have elected to exclude from consideration these tax effects. For example, in Georgia, the measure of damages for wrongful death is the full value of the life of the deceased, from the perspective of the decedent. It includes lifetime income with no deduction for consumption or income taxes (Brookshire 1987).
Franz (1989) argues that the problems of projecting future tax obligations and explaining these complications to the jury outweigh the potential small variations that may result from their inclusion, and therefore he ignores them when calculating present value of loss. Harris (1994), Aalberts, Clauretie, and Jameson (1994) and others have identified the distributional effects associated with the inclusion or exclusion of taxes to the decedent's income and have shown that the effects may be positive or negative depending on the age of the decedent and the projected rate of growth in the decedent's earnings.
Prior to the research presented here, no one has addressed the nature of or quantified the magnitude of the tax effects associated with omitting the tax filing status change and loss of one personal exemption on the resulting loss of aftertax support for the surviving spouse. Unlike the positive or negative errors that may result from omission of taxes for the decedent's earnings and the discount rate, the omission of the change in tax filing status and loss of one personal exemption, can only reduce the assessed value of loss in the wrongful death when the surviving spouse has taxable future income. The nature and magnitude of this downward bias to the value of loss is the subject of this research and will be developed in sections to follow. The modeling of this loss is presented in section 2, the magnitude of loss for varying case-specific parameters is presented in section 3, and the research is summarized and concluded in the last section.
Model and Assumptions
Economic loss in a wrongful death case is generally limited to loss of the decedent's direct financial support and services to surviving family members, net accumulation to the estate, and funeral expenses. The specific content of the statutes of the 50 states (and the district of Columbia, Puerto Rico, and the Virgin Islands) for 25 distinguishable elements of the award, limitations, and procedures are presented in a tabular form in Schap and Valvo (1997). Economic loss of support and the accumulation to the estate are derived from the decedent's aftertax earnings net of his/her personal consumption. …