Personal Injury Compensation as a Tax Preference

Samuel Johnson tells us "[d]epend on it, sir, when a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully." Projected federal budget deficits in the realm of $200 billion a year for the foreseeable future ought to have a similar effect: a concentration on means of reducing these unacceptable deficits. The simple answer is either to spend less or tax more, or perhaps, a bit of both. If we choose to tax more, we must either raise tax rates or widen the tax base, or both. The former, a general rise in tax rates, seems unlikely. If tax rates are to remain constant, and constantly too low, then greater tax revenues will be achieved only by broadening the tax base. Rate reduction and base broadening are inevitably coupled. Having adopted a general rate reduction, we now must face the need for a broader tax base. The latter can be achieved only by the elimination of those Internal Revenue Code (Code) sections that narrow the tax base by either exempting income or granting deductions. A case in point concerns sections 104, 105 and 37 of the Code which, in general, exclude from gross income amounts received on account of personal injuries or sickness whether from workmen's compensation, suit or agreement, or insurance. These sections, with antecedents in the 1918 Revenue Act, seem innocuous and perhaps even justifiable on humanitarian grounds. This Article will argue, however, that if we are serious about broadening the tax base, then we ought seriously to consider repeal or substantial modification of sections 104, 105 and 37.