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
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Social Mobility Wins
When people live within an environment offering good jobs, good education, social networks, and a culture of self-improvement and hard work, they experience progress in a way that undercuts the philosophical rationale that socialists need to justify the policies they advocate.
Kevin Warsh and the Future of Fed Communication
Warsh is right that the Federal Reserve should not speak so loudly that it hears only its own echo.
