Trial attorneys impose significant expenses on American families, and current tax regulations seem to encourage this trend.
The rise in frivolous lawsuits in the U.S. court system has been notable in recent years, often at the expense of average households. A study by the U.S. Chamber of Commerce Institute for Law Reform revealed that the total costs associated with tort lawsuits exceeded $529 billion in 2022, which amounted to about 2.1% of GDP or roughly $4,200 per U.S. household.
These costs have been rising at an annual average of 7.1% from 2016 to 2022, surpassing inflation rates. This situation affects American households in two main ways. First, an influx of frivolous lawsuits clogs the court system, leading to delayed legitimate cases and extra financial burdens on taxpayers. Second, businesses facing legal costs often pass those expenses to consumers, resulting in higher prices.
The likelihood of frivolous lawsuits increasing—and targeting a broader range of businesses—could inflate overall economic conditions. According to a study from the Perryman Group, excessive tort costs are driving up prices on everyday items, with prescription drug costs experiencing a notable rise of 9.02% attributable to litigation expenses.
A major contributing factor to this issue is Third Party Litigation Funding (TPLF). Through TPLF, a third party provides financial support to one side of a lawsuit, often in exchange for a share of the potential financial outcome if the case is won or settled. This industry has seen rapid growth, with annual revenues estimated to be around $15.3 billion lately.
Some of these funding sources are U.S.-based investment companies, while others have questionable motives. A hearing conducted by a House Judiciary subcommittee last year highlighted how foreign entities, including the Chinese Communist Party, exploit TPLF to undermine the U.S. legal system and disrupt civil litigation processes.
Testimonies during the hearing indicated that such foreign interference could siphon money from Americans for overseas transfers, facilitate the theft of trade secrets, and pit American businesses against international competitors.
Additionally, TPLF has been manipulated for political motives. Trial lawyers primarily support Democratic candidates, contributing significant sums—like $47 million for Kamala Harris—aiming to influence judicial decisions that challenge conservatives in 2024 and launching numerous lawsuits aimed directly at President Trump’s businesses.
It appears that some wealthy leftist figures, like George Soros, have utilized TPLF to initiate lawsuits against conservative groups and challenge major energy and infrastructure projects through environmental lawsuits.
Despite these negative consequences for the public, the government currently supports third-party litigation funding through tax incentives.
Profits gained by third-party funders from lawsuits enjoy lower capital gains tax rates compared to the ordinary income tax rates that plaintiffs and defendants must pay for similar monetary awards. This inconsistency raises concerns about fairness in the tax system.
In response, Sen. Thom Tillis (R-N.C.) proposed the Anti-Predatory Litigation Financing Act (S. 1821), with support from several other senators. This legislation seeks to eliminate existing tax breaks for TPLF by subjecting profits to ordinary income tax rates.
According to Americans for Tax Reform (ATR), this change could enhance overall tax revenue, which they believe should be counterbalanced with growth-oriented tax cuts. ATR has previously suggested leveraging this extra revenue to support beneficial tax policies, following the principles established during Trump’s tax cuts.
There are various taxes impacting everyday Americans that could be reduced to offset the revenue gained from TPLF reform. For instance, legislators like Sen. Ted Cruz (R-Texas) and Rep. Max Miller (R-Ohio) are advocating for a system that allows full deductibility of gambling losses, rather than the reduced allowance of 90%. Such reforms could return fairness by ensuring that Americans aren’t taxed on income they never actually receive. Revenue from TPLF reforms could effectively support this necessary tax adjustment.
Addressing TPLF abuse while offering tax relief to everyday Americans seems like a coherent strategy. It would alleviate the financial strain excessive litigation currently places on households and help safeguard citizens from potential manipulative foreign influences.
Congress is urged to act swiftly on the needed reforms for third-party litigation funding.
