Discounting After-Tax Earnings with After-Tax Yields in Torts Settlements

Computing awards for lost future earnings in torts settlements by discounting after-tax lost earnings with after-tax rates of return produces correct compensation in the sense that projected after-tax lost earnings will exactly equal the after-tax lost earnings which are discounted. Using before-tax interest rates as discount rates, the historically more common practice, produces substantial compensation errors. Awards will be the same using either the nominal or the real approach to after-tax discounting, providing that the real interest rate is specified correctly in its relationship to the nominal interest rate.