Study: ‘Tort Tax’ is North of $800 Billion Annually

A Tuesday subscriber-only Wall Street Journal op-ed a week ago by Lawrence McQuillan and Hovannes Aramyan tablulated the damage (the Pacific Research Institute’s home page for the study is here, and has a PDF link to the full study, their press release, a number of other items):

The good news: We now have some reliable figures. The bad news: The costs are far higher than anyone imagined.

Based on our estimates, and applying the best available scholarly research, we 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? We applied the rent-seeking theory of transfers from economic science to pick up where past studies — including the highly regarded Tillinghast-Towers Perrin study — leave off. We began by examining 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. The annual static costs, $328 billion per year, are well in excess of previous Tillinghast estimates.

But $328 billion is only the beginning. After all, litigation doesn’t just transfer wealth, it also changes behavior, and often in economically unproductive ways. Any true estimate of the costs of America’s tort system must also include these 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.

Here are the beyond-static, or “dynamic,” costs identified:

• “….. medical liability concerns increase annual health care spending by $124 billion in 2006 dollars.”
• “(those liability concerns also add) 3.4 million Americans to the rolls of the uninsured ….. (causing) a total loss of output we estimate to be $39 billion per year.”
• “….. we found that foregone R&D due to excessive liability results in lost sales of new products every year of over $367 billion.”
• “….. we determined that more than 77,000 people would have been alive today and contributing to the workforce, but are not because of a failure to enact comprehensive tort reforms in the states. The cost of foregone output from these lost workers is more than $7 billion each year.”

So we’re left with the question of who ends up “paying” the tort tax. It would appear to be everyone who hasn’t collected a major judgment in the lawsuit lottery. More specifically, based on the first two bullet items above, you can state with a pretty high degree of confidence that the less well-off who end up without medical insurance thanks to litigation madness are carrying a disproportionate share of the “tort tax” burden.