THE TORT TAX
March 27, 2007
Economists have long understood that America's tort system acts as a serious drag on our nation's economy. Although many excellent studies have been conducted, no single work has fully captured the true total costs, both static and dynamic, of excessive litigation. The good news: We now have some reliable figures. The bad news: The costs are far higher than anyone imagined, say Lawrence J. McQuillan, director of business and economic studies at the Pacific Research Institute, and Hovannes Abramyan, a public policy fellow.
- Based on their estimates and applying the best available scholarly research, they believe America's tort system imposes a total cost on the U.S. economy of $865 billion per year.
- This constitutes an annual "tort tax" of $9,827 on a family of four.
- It is equivalent to the total annual output of all six New England states or the yearly sales of the entire U.S. restaurant industry.
How does the legal system extract such an astounding amount from our economy?
- The static costs of litigation -- including annual damage awards, plaintiff attorneys' fees, defense costs, administrative costs and deadweight costs from torts such as product liability cases, medical malpractice litigation and class action lawsuits - totals about $328 billion annually.
- The dynamic costs of litigation -- the impact on research and development spending, the costs of defensive medicine and the related rise in health-care spending and reduced access to health care, and the loss of output from deaths due to excess liability -- totals about $537 billion annually.
And if you're wondering who the victims are of a tort system out of control, the answer today: almost everyone, say McQuillan and Abramyan.
Source: Lawrence J. McQuillan and Hovannes Abramyan, "The Tort Tax," Wall Street Journal, March 27, 2007.
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