A Tax Break for Foreigners and Trial Lawyers
This may be the most perverse incentive of the U.S. tort system.
America’s one-of-a-kind tort system generates many perverse incentives, but this one takes the cake: Foreign investors receive special tax treatment for financing lawsuits against American companies. Congress should close the loophole that lets Russian oligarchs bankroll legal battles in the U.S. without paying a dime in federal taxes.
America’s already sky-high liability costs grew at an average 7.1% annually between 2016 and 2022, draining capital from productive investment. Litigation finance is a major driver. Funders shunt capital from around the world into U.S. lawsuits, taking a cut of any recovery. One recent estimate puts the lost productivity costs of third-party financed litigation at $54.2 billion annually.
Worse, foreign funders in litigation finance are rewarded with a tax advantage. Take three identical cases. One, a plaintiff pays a law firm $100,000 and recovers $1 million. Two, the law firm fronts the costs on contingency and achieves the same result. Three, a funder contributes $100,000 for the same outcome.
In each scenario, someone invests in a legal claim that generates a positive return, but the tax consequences are very different. The plaintiff and the law firm are hit with a higher tax bill as a result of tax-code provisions subjecting recoveries to ordinary income-tax rates, which top out at 37%.
Economic Dynamism
The Price of Stagnation: Britain’s Retreat from Dynamism
We face a basic issue: we do not let cities or communities grow or die.
.jpg)
London and the Architecture of Creative Growth
Preserving London's creative dynamism will require humility from policymakers and a commitment to keeping the city liveable.
.jpg)
.jpg)
The New Frontier of Capital: What SpaceX’s IPO Tells Us About American Capital Markets
The ultimate trajectory of SpaceX remains uncertain, a reflection of the inherent nature of progress at the frontier rather than a flaw in the system that produced it.
Chicago’s “Disappearing Middle Class” Can Be Found in Its Proliferating Upper Middle-Class Neighborhoods
The middle class has not been hollowed out; rather, the overall decline stems from the net movement of families upward into the upper-middle class.
.webp)
Is Economics a Failure?
Rather than ending with “economics is broken,” Alexander Rosenberg’s deliberately provocative book 'Blunt Instrument' argues that “economics is useful for a different reason than economists often say.” That is a serious and worthwhile thesis.
Locke, Meet Claude
The concern is not regulation per se. It is a regulation that outruns its justification by arriving before the evidence, foreclosing the technology before its benefits are understood, and insulating the powerful from competition that would otherwise discipline them. That is the pattern worth resisting.
