NCPA - National Center for Policy Analysis

CONSUMERS, EMPLOYEES, INVESTORS HARD HIT BY LITIGATION COSTS

August 9, 2004

The "litigation tax," the burden on the U.S. economy arising from an inefficient tort system, costs society billions of dollars annually, says Glenn Hubbard, former chair of President Bush's Council of Economic Advisers.

According to the CEA:

  • In 2002, it was estimated that the U.S. tort system's direct costs total about $180 billion a year.
  • Only about 20 cents of each dollar of tort cost is paid to the victims, with that share falling since the late 1980s.

The total economic burden of the U.S. tort system is higher still when one incorporates the distortions that arise as individuals and companies try to avoid lawsuits, says Hubbard. For example, additional costs stem from defensive medicine, decisions by managers to remove products from the market and slowed innovation.

The cost of tort trials may be collected from the company, but ultimately its burden is borne by workers who lose their jobs or see their wages go down, by consumers who pay higher prices, by landowners who experience a decline in property values and by investors through lower profits and share prices.

  • If the burden was borne just by workers, litigation costs would be equivalent to 2.1 percent of wages and salaries.
  • If the tax were borne by consumers, it would be equivalent to a tax on income from savings of 3.1 percent.

Source: Glenn Hubbard, "Let's Put the 'Litigation Tax' on Trial," BusinessWeek, August 9, 2004.

 

Browse more articles on Government Issues