A commenter on my Income Tax and the Sanctity of Property in Our Constitutional System writes:
You are ALL missing the point. Compensation for a tortious wrong is not income. If it were taxed, then you would not be made whole. Let's say someone negligently chops off your arm and then pays you a settlement that perfectly compensates you for the loss of your arm. There is no income. There is no gain. The money is just compensation for the loss of your arm. That money = your arm. Because the government cannot take a random piece of your arm, the government cannot tax your compensatory judgment. No level of American government has the right to just hack off a little piece of your arm. All of you on this thread are absolutely wrong and you should be ashamed. This decision is absolutely right.
Let's follow the flow of the argument. The argument begins with a sensible claim about the tort system: If compensation for a tortious wrong were taxed, then you wouldn't be made whole. To give a concrete example, say I have $100,000 in assets; I pay no income tax on that capital. Say then that someone steals the $100,000, and I get it back from him, whether through litigation or otherwise -- I'm no better off than I was before the theft, so it's hard to see why I should end up just with just $60,000, after the state and federal governments get their income tax cut. If we treat personal injury causing $100,000 in pain and suffering as similar to the theft of the $100,000, the principle of tort law is to try to put me back as much as possible into my pre-injury condition, by awarding me $100,000 in damages. Taxing those $100,000 would leave me worse off than I would have been but for the injury (assuming that $100,000 is indeed the compensation that leaves me as well off as before, and thus accepting the theory that the money compensates me for pain). Allowing this money to be taxed would thus undermine the goals of tax law.
Then the argument continues, appealing to the logic of income tax law and not just tort law: "There is no income. There is no gain. The money is just compensation for the loss of your arm." Because the income tax generally taxes income, the argument goes -- stuff you get on top of what you had before -- and because the compensation doesn't really give you more than you had before, taxing the compensation is inconsistent with the underlying principles of income tax law as well as of tort law. So far so good.
And then the argument abruptly plummets from sensible, albeit necessarily cursory, policy argument into sheer formalistic zaniness: "That money = your arm. Because the government cannot take a random piece of your arm, the government cannot tax your compensatory judgment. No level of American government has the right to just hack off a little piece of your arm. All of you on this thread are absolutely wrong and you should be ashamed. This decision is absolutely right."
"That money = your arm"?! Equals? Not just that money compensates you for the loss of your arm, but actually equals it?
That statement is simply and obviously false. It may represent a metaphor at the heart of tort law, but metaphors aren't reality. They may help us understand reality, because in some ways they represent reality. But in other ways they depart from reality (that's why they're metaphors).
"That money = your arm" may make sense for the purposes of understanding how tort law (or even tax law) often treats compensation for personal injuries. But you can't use it with arguments about the law or morality of dismemberment, because those arguments work only with actual arms, not just with metaphorical equivalents of arms. After all, if "that money = your arm," does it mean that if you get the money and then go bankrupt, your creditors can't recover part of that money, given that creditors can't physically dismember you? If "that money = your arm," and then you buy a house with that money, does it mean that "that house = that money = your arm," and you can't be required to pay property taxes on that house? I'd say "that way lies madness," but the madness actually lies at the very first step, which is treating "that money = your arm" as reality rather than metaphor.
Now this is an extreme sort of error; hardly anyone goes quite this far in believing his own metaphors. But I do think it's a helpful illustration of a general problem.
I'm often a formalist in the sense that I generally think that formal legal characterizations are often worth using. That something is called "speech" should influence the way we treat it, and even if we call other things than speech (e.g., waving a flag, wearing a cross, using sign language) "speech," once this characterization is accepted it may make sense to use it in a broad range of cases. But we should never forget that these labels are metaphorical, otherwise figurative, or just generally imprecise. We should never forget that in law, "X = Y" is often just a shorthand for "X is like Y in certain important ways" or "X should be treated like Y in certain important way," that in certain other ways X and Y can remain quite different, and that therefore treating them as genuinely equal is a recipe for massive error.
A classic legal fiction is said to be that for certain old English legal purposes the island of Minorca was treated as being "located within the parish of Mary-le-Bow in the ward of Cheap in the city of London." Yet even if that, within the English legal system, was a perfectly sensible way of dealing with certain kinds of procedural matters, you shouldn't try to walk there from the Houses of Parliament. "Think things not words," as Justice Oliver Wendell Holmes admonished, "or at least ... constantly translate [y]our words into the facts for which they stand, if [you] are to keep to the real and the true."