The Lawsuit Tax
There is a hidden tax that most Americans don't think of as one of the many taxes imposed on them. But it is a very costly tax. This is the lawsuit tax.
by Fred E. Foldvary, Senior Editor
The lawsuit tax consists of lawsuits which go beyond genuine restitution and payments to lawyers beyond what would be needed to engage legal services. In a pure market economy, lawsuits are an important tool in seeking restitution from fraud and to enforce contracts. Lawsuits should use the English system where the guilty or losing party pays the legal costs of both parties.
But in the American system, a winning defendant has to pay his own legal costs. This imposes a tax on him when one is sued for no good reason and must hire expensive attorneys to defend oneself. Doctors and other practitioners and enterprises must then buy liability insurance to protect themselves. High awards and settlements, including punitive damages, get passed on to consumers, who ultimately pay for the lawsuit tax along with shareholders and owners.
According to Lawsuit Abuse, Guess Who Picks Up the Tab, by the American Tort Reform Association (http://www.atra.org), the lawsuit tax amounts to an annual cost of $1,200 per person. That constitutes wasted resources that could have been spent to produce goods or increase leisure. That's on top of the explicit taxes and the cost of regulations. U.S. tort costs are 2.2% of GDP, the highest among the industrialized countries if not the world.
Other groups working for legal reform include Citizens Against Legal Abuse (CALA), with chapters in several cities (http://www.cala.org) and HALT (http://www.halt.org).
The lawsuit tax contributes to the high cost of medical care. Over half the cost of most vaccines comes from liability insurance. Fear of lawsuits inhibits research and the introduction of new treatments.
Besides changing to the English loser-pays method, several other reforms would eliminate the lawsuit tax. First, freedom of speech must be restored to legal advice. Laws such as in Texas restricting the right of publishers such as the Nolo press (http://www.nolo.com) to publish books and CDs must be struck down.
Secondly, yank the requirement to have a license in order to practice law. Let any citizen defend himself or others without having to attend law school or pass an exam. A defendant may then choose whether or not to hire an expensive licensed lawyer.
Third, make it easier and simpler to file lawsuits without a lawyer. Eliminate detailed requirements for forms and legal papers. Make law accessible in plain English.
Fourth, we need to cap jury awards. There needs to be a uniform standard of punitive damage awards. The ability of juries to make awards at will with no limit amounts to an arbitrary tax.
Fifth, we need fully informed juries which are explicitly able to judge the law as well as fact. This is more important for criminal cases, but should be applicable to all lawsuits.
Sixth, we need a uniform rule of the market, that all products are presumed safe and effective unless stated otherwise. Potential dangers must be labeled, with information available. Those who then use products assume the risk, and the seller is not liable.
These legal reforms will be resisted by legislatures, because they are dominated by lawyers. So ultimately we need to reform democracy itself, the method of voting and the structure of governance, to shift power from legal elites to the citizens.
Then the lawsuit tax will be eliminated, along with regulatory taxes and explicit taxes on wages and goods. With good governance and a sound legal system, sensible folks will choose the public finance that is most just and efficient - land rent.
The implicit lawsuit tax is like the income tax and sales taxes, an unnecessary burden that we impose on ourselves out of ignorance and apathy, letting the greedy siphon off much of the great wealth our economy produces.
-- Fred Foldvary
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Copyright 2000 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.