I’ve heard that a “tort tax” costs a family of four about $3,200 a year in higher prices for products and services.

Ever hear that there are lies, damn lies, and statistics? Well, that $3,200-for-a-family-of-four statistic is based upon a study that found that about 2% of America’s GDP is related to the legal system. Tort reformers use the study to argue that if we could get rid of those expenses, it would be like giving an extra $800 to every American, or $3,200 to a family of four. On its face, that sounds logical, but it really isn’t.

For example, why stop with the legal industry? Since America spends $248 billion a year on advertising, let's gut the ad industry, too - giving another $3,400 to a family of four. And since we’re on a roll, let’s just get rid of the other 96% of the GDP, which would give a family of four over $200,000 per year! That's just silly, and so is the "tort tax" argument.

But there’s another flaw in the “tort tax” argument, too. My doctor recently finished paying off his copier, which was almost $700 a month. But instead of lowering his fees to pass the savings on to his clients, he’s taking that $8,400 a year home to his family, like most people would.

The “tort tax” argument asks you to believe that every time a business reduces its expenses that it will lower prices by the same amount instead of enjoying a higher profit.

Do you?

Comments

[Matt]

Justinian,
It is very difficult to take your argument seriously. Advertising generates economic activity while meritless lawsuits crush it. It is perfectly reasonable to argue that eliminating advertising would cause a decrease in spending and harm the economy. No such claim can be made for frivolous lawsuits. If there were a government program that burned $200 billion each year in a massive bonfire, reasonable people would rightly oppose it. What intelligent person would contend otherwise?

As for your second point, do you seriously believe that lower costs do not lead to lower prices?

[Justinian Lane]

Matt, I'll address your points in reverse order.

I do not believe that companies lower their prices to directly correspond with savings. They often pocket some or all of the savings as profit.

Now about advertising. I'm not suggesting we eliminate ALL advertising, just as I'm sure you're not advocating the elimination of ALL tort suits. But why not eliminate the meritless advertising?

Probably because there is no ex ante way to eliminate meritless advertising without eliminating at least some useful advertising. The principle is the same with lawsuits; no "reform" will eliminate ONLY meritless lawsuits.

Maybe you're comfortable throwing some injured citizens under the bus so we can have lower bus fare... but I'm not.