America has become far too quick to turn disputes into lawsuits. These cases can enrich trial lawyers, but a newer practice raises another concern: overseas investors help pay for U.S. litigation and may receive their share of any award under more favorable tax rules than the American plaintiffs they fund.
Here’s the basic arrangement. A foreign sovereign wealth fund or another overseas investor identifies a lawsuit it believes could produce a large payout. It then agrees to cover some of the litigation costs, often in exchange for a set portion of any eventual award. The plaintiff’s compensation is generally taxed as ordinary income. The fund’s return, however, may be treated as a capital gain, which can carry a lower tax rate. And foreign investors often pay no U.S. tax on capital gains from U.S. sources.
At a recent congressional hearing, Treasury Secretary Scott Bessent criticized the practice, calling foreign financing of American lawsuits “a malignancy” in the judicial system. His concern is that the arrangement pulls money out of the U.S. economy, adds to costs for businesses and consumers, and may encourage more litigation. Bessent also argued that foreign financiers are claiming preferential tax treatment while avoiding U.S. taxes altogether.
There is a basic mismatch here. Lower capital-gains taxes are meant to encourage investment that supports production and economic growth. Foreign funds backing lawsuits, critics argue, are not investing in that kind of growth. They stand to profit when litigation imposes costs on American businesses.
Congress should close this loophole and use the added revenue to support tax relief that encourages growth. Some lawmakers may say there isn’t enough time to act this year, but Congress has several weeks of scheduled work remaining and could add more if it chose to. It may not be convenient, especially during the busy holiday season. Still, that seems a weak reason to leave the issue unresolved.
Congressional Republicans have also discussed passing another reconciliation bill, which can move through the Senate without being subject to a filibuster. That could provide a path to change the tax treatment and return the resulting revenue to American taxpayers.
If lawmakers cannot agree on a bill soon, the White House should work with Bessent to determine whether the administration has lawful options to address the advantage foreign litigation financiers receive.
Either way, closing the loophole could help consumers and businesses while limiting the financial incentives behind some costly lawsuits. Congress should get to work on it.
