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Taxation of employment-law damages

The proposed Civil Rights Tax Relief Act of 2007 is the latest effort in Congress to make the tax code more favorable to employment-law plaintiffs, by (among other steps) declaring damages for emotional distress in job-bias cases to be tax-free (via Caron). The argument is that plaintiffs in conventional tort cases can already exclude such damages from taxable income, and so employment-law plaintiffs should get to do so too. (The possibility of bringing uniformity to the scene by subjecting the conventional tort claimants to taxation is, of course, unthinkable). Note Prof. Berger's perfectly cool-headed invitation for plaintiff and defense interests to collude against the interests of the public fisc: plaintiffs and their lawyers are of course supposed to favor the tax break for the obvious reasons, while defendants are urged to favor it because it would "encourag[e] lower (because less taxable) settlements". Can you spot a possible flaw in that logic from the defendant's point of view? Maybe the possibility that by making employment lawsuits more lucrative it will encourage more of them to be filed in the first place? (& welcome Prof. Caron readers).

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Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.