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New Study Shows Economic Benefits of Civil Justice System, Debunks 'Tort Tax' as Fabrication of Insurance Industry

[Column 347, July 25, 2005] | Archived Columns

By Todd A. Smith*

Is the civil justice system good for the economy? That question is at the heart of the debate over whether to make it easier or harder for Americans who are injured by unsafe products, fraud, medical malpractice, or corporate negligence to sue.

Defenders of the civil justice system say it provides a peaceful and efficient way to resolve disputes between individuals and corporations. It ensures that, when a company is irresponsible, the company—not the taxpayers—has to pay for the harm. And it deters corporations from unsafe practices and making dangerous products.

Those who want to make it harder for injured consumers to sue say that lawsuits amount to a "tort tax" by discouraging investment and adding to the cost of doing business.

A new study by the Economic Policy Institute (EPI), a non-profit, non-partisan think tank, examines these claims and looks at the hard numbers. What they found is that idea of a "tort tax" isn't supported by the economic facts, and is the invention of the insurance industry.

This phony "tort tax" is the creation of Tillinghast Towers-Perrin (TTP), a consulting firm for the insurance industry. TTP refuses to release the numbers it uses to reach its controversial conclusions.

TTP admits that approximately half of what it alleges to be costs of the legal system are actually payments from wrongdoers to victims. The researchers at EPI point out that these "costs" exists whether or not the courts require payments to be made to the victims because the damage (the injury or economic loss) has already been done.

When Enron defrauds stockholders, or a child is injured because Firestone refused to pull defective tires from the market, that's an economic loss. The only question is, who pays?

"Someone—the wrongdoers, taxpayers (through government-sponsored social programs), others insurers (such as health insurance), charities, or the victim—will need to pay or absorb these costs," write the EPI researchers.

EPI isn't the first to point out that the "tort tax" doesn't really exist.

Business Week editorialized in March 2005 that, "The latest Bureau of Economic Analysis statistics show legal services accounting for less than 1.5% of gross domestic product, a lower share than in 1990. The 'litigation tax' … is a wild exaggeration."

Do lawsuits reduce investment and research and development (R&D), as some critics of the civil justice argue? EPI looked at the historical data.

Lawsuits did increase between from the late 1970s to the mid-1980s. But R&D spending during this time rose rather than fell. Lawsuits decreased between 1987 and 2001, and during this time R&D remained stable.

What about corporate profits? If there's a negative impact of lawsuits on corporate profits, it doesn't turn up in the data. U.S. corporate profits increased by 14% in 2002 and 17% in 2003, reaching an all-time high of more than $1 trillion, according to the US Department of Commerce.

What about the idea that medical malpractice lawsuits drive up the cost of health care? Another un-truth, says EPI. The non-partisan Congressional Budget Office has estimated that all medical malpractice costs amount to less than 2% of overall health care spending.

The EPI researchers found that, despite the rhetoric from politicians, the number of lawsuits has declined steadily for years. And researchers found immeasurable lives and money saved as the result of product safety improvements brought about by lawsuits.

Lawsuits helped contribute to 11 of 14 major auto safety improvements in the last three decades. Highway deaths have fallen to the lowest rate ever recorded, and cars are safer than ever before.

Lawsuits have helped make lawnmowers safer, convince cities to put gates around pubic swimming pools that reduce drowning deaths, force corporations to clean up toxic waste, get dangerous pesticides off fruits and vegetables, lead to air bags and rear-sear shoulder belts in cars, take flammable pajamas off the market, and contributed to major improvements in hospital safety and higher standards in nursing homes.

It's been the threat of litigation, not FDA regulation, that has gotten deadly drugs like fen-phen and Vioxx off pharmacy shelves.

It's easy to imagine what would happen without the civil justice system: More corporations would focus solely on the bottom line, with little or no concern about product safety or being held responsible for negligent decisions. Corporate profits might be a little higher, but the economic and human costs of needless injury and death would be enormous.

America has the most powerful economic system of any country in the history in the world. What this new research from the Economic Policy Institute tells us is that the success of the American free enterprise system is because of our strong civil justice system and rule of law, not in spite of it.

*Todd A. Smith, president of the American Association for Justice, is a partner in the Chicago, IL, law firm of Power Rogers & Smith.