Study Claims U.S. ‘Tort Tax’ Tops $9,800 Per Family

March 27, 2007

America’s legal system imposes an economic cost of more than $865 billion every year, or more than $9,800 per family, according to a new study released by the Pacific Research Institute (PRI), a free-market think tank based in San Francisco.

This figure is 27 times more than the federal government spends on homeland security, 30 times what the National Institutes of Health dedicate to finding cures for deadly diseases, and 13 times the amount the U.S. Department of Education spends to help educate America’s children.

The authors of “Jackpot Justice: The True Cost of America’s Tort System” calculated that the nation’s tort system imposes a yearly “tort tax” of $9,827 for a family of four and raises health care spending in the U.S. by $124 billion.

According to the study’s lead author, Dr. Lawrence J. McQuillan, unlike previous studies, Jackpot Justice calculates both the direct and indirect costs of America’s legal system.

These include not just the direct cost of annual damage awards, plaintiffs’ attorney fees, defense costs, and administrative costs from torts but also the indirect cost of the legal system’s impact on research and development spending, the cost of defensive medicine, the related rise in health care spending and reduced access to health care, and the loss of output resulting from deaths due to excess liability.

“America’s legal system doesn’t just transfer wealth from companies to personal injury lawyers,” said Dr. McQuillan. “It also changes behavior in economically unproductive ways. Any true estimate of the economic cost of our tort system must include these dynamic, negative-spillover costs.”

Among the report’s claims:

The $865 billion annual cost of America’s tort system is equivalent to the total yearly sales of the entire U.S. restaurant industry.

Every day, the American economy takes a $2.4 billion hit to sustain its legal system.

More than 51,000 U.S. jobs have been lost due to asbestos-related bankruptcies alone. Employees at these bankrupted companies have lost $559 million in pension benefits.

The liability system increases the cost of many risk-reducing products and services and health care services, making them less accessible, and in some cases unavailable to consumers. PRI estimates that more than 114,000 people would be alive and working today, but are not due to inefficiencies in the tort system over the last two decades.

The practice of “defensive medicine” by litigation-fearing physicians increases American health care costs by $124 billion per year and adds 3.4 million Americans to the rolls of the uninsured.

American companies suffer over $367 billion per year in lost product sales because spending on litigation curtails investment in research and development.

Lawsuits against American corporations generate an annual loss of $684 billion in shareholder value. Half of all Americans own stock either directly or indirectly through 401(k)’s or pensions.

According to another study cited by PRI, the U.S. spent 2.2 percent of its GDP on tort costs, compared to 0.7 percent for the United Kingdom, 0.8 percent for Japan, and 1.1 percent for Germany. Tthe authors project that America wastes $589 billion per year on excessive social tort costs, equivalent to the total annual output of Illinois, compared to competing foreign countries.

“An efficient tort system provides proper incentives to firms to produce safe products in a safe environment and ensures that truly injured people are fully compensated for their injuries,” said Dr. McQuillan. “Through tort reform, the U.S. can become a more favorable place to invest human, physical, and financial capital—the ingredients for self-sustaining economic growth and a rising standard of living for all Americans.”

Source: Pacific Research Institute

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