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That didn't take long: first Democratic earmark for trial lawyers

That didn't take long: Section 203 of S. 349, a bill that purports to provide tax relief to business, claims it is going to fund itself with additional taxes on business by ending deductions for punitive damages. As Martin Grace notes in the insurance context, most of this tax increase from the random imposition of punitive damages is simply going to get passed on directly to American consumers as a cost of doing business.

What Grace doesn't note is that it's also a wealth transfer directly to trial lawyers. With punitive damages 50% or so more expensive to a defendant (but the same value to the trial lawyer), the law creates additional settlement pressure on defendants to settle a case before punitive damages are assessed rather than defend itself in court against unfair attacks. One can expect an increase in lottery litigation.

I disagree with Grace that none of this cost will fall on workers or investors. While many wealthier investors can shift investments away from litigation targets to friendlier environments, others have less fungible portfolios. There will be a decline in total economic activity at the margin, and this will hurt employment and investors at the margin as well. (Update: Grace has since modified his position to reflect the fact that the bill affects more than insurers, and has a good cite to the CBO study showing that 70% of the effect of corporate taxation falls on workers.)

Meanwhile, the total amount of punitive damages awarded in trial can be expected to go down as more defendants cave into extortion before verdict, and dishonest or foolish academics will point to this incomplete data as evidence that punitive damage law needs no reform while ignoring the ex ante effects of the law. The net effect is going to cost business and consumers more money; the net effect on government revenues is likely negative depending on whether the decline in jury verdicts more than offsets the increase in government take. In California, where a law was passed to directly tax punitive damages, the government take dropped to zero as plaintiffs' and defense attorneys simply negotiated around the new rule in settlements.

It's lose-lose for everybody—except, of course, the trial lawyers. Where's the outrage?

(AP/CNN reports that the bill also applies to court settlements paid by companies that have been sued, but Section 204 of the bill is limited solely to consent decrees in actions brought by the government, and has no effect on private causes of action.)



Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.