Article I of the U.S. Constitution vests the Congress with the authority to levy taxes to “provide for the common Defence and general Welfare of the United States.” Many policy observers are aware that Congress will exercise that authority as it grapples with how to extend the 2017 tax law that will substantially expire in one year. Related, as the power of the executive branch has grown, so too has the capacity of the regulatory state to impose taxes through regulation – $1.8 trillion under the Biden administration – on the economy. The incoming Trump administration and the new Congressional majority are poised to rein in the administrative state’s taxing power by paring back burdensome regulations. The incoming administration should likewise look to reduce the pernicious effect of excessive litigation and torts that impose a very real, if opaque form of taxation on the U.S. economy.
A recent court ruling relating to Tesla Elon Musk’s pay package as Tesla Motors CEO is emblematic of this taxation by tort, and unlike income taxes, the revenue provides neither for the common defense nor the general welfare, but rather the enrichment of the trial bar. Irrespective of the facts of the case, the awarding of $345 million in legal fees to the plaintiff’s attorneys should be deeply troubling to any reasonable policymakers who want American economic preeminence to persist in the face of increasingly direct competition with China. A legal system that credulously ascribes the practice of suing companies with a value of over $17,690 per hour has clearly lost its way.
Perhaps the most remarkable aspect of this award is that it is but a fraction of the attorney’s initial demand. The plaintiff’s attorney originally sought fees as high as $7.7 billion. For context, this is greater than the market cap of Volvo Cars. Other than discovering a new means for monetizing legal processes, the plaintiffs’ attorneys create nothing other than an incentive for their professional colleagues to find the next great American company to sue. While this is not a novel issue, the scope and scale of the practice has ballooned.A November 2024 U.S. Chamber of Commerce Institute for Legal Reform (ILR) study found tort costs amounted to $529 billion in 2022, or 2.1 percent of U.S. GDP, including $215 billion in automobile accident claims. The ILR study found that tort costs have grown at an annual rate of 7.1 percent each year from 2016 to 2022, which exceeded the rate of inflation over the same period. As the study noted, the costs to businesses of the tort system will double in a little over eight years.
Incentives matter, and indeed, as torts become more lucrative, so too does the cost of insuring against them. While opaque, liability insurance against runaway torts is every bit a tax on U.S. innovators as the corporate tax rate or costly regulations. At 2.1 percent of GDP, the costs to businesses and families from tort liability is greater than the U.S. corporate tax, which amounted to 1.8 percent of GDP in 2024.
As these costs grow, they become embedded in prices consumers pay. Even if you don’t own a car, exploding auto insurance premiums get embedded in the cost of transportation, much like the cost of medical liability insurance raises the cost of health care for patients. The cost of doing business in the face of the threat of litigation ultimately comes out of consumers’ pockets. As the ILR study found, on average U.S. households paid a $4,207 tort tax in 2022.
The problem of runaway litigation has little to do with Elon Musk and everything to do with the climate for investment and innovation in the U.S. Market participants and investors have accurately sounded the alarm over the signal the fee award sends. One observer, Florida’s Chief Financial Officer Jimmy Patronis, noted that the award is “…like throwing sand in America’s economic engine.” And he should know, as Florida has embarked on reforms to rein in the cost of excessive litigation. These reforms, and those in other states such as West Virginia, are starting to bear fruit according to ILR, with consumers beginning to see stabilization in some insurance markets.
As the Delaware judgment makes clear, more could be done at the federal level to curb the egregious growth in tort costs. There is every reason to believe that the incoming administration will address the threat of major income tax increases and begin to claw back some of the growth in the administrative state. They should also embrace the opportunity to cut tort taxes that are every bit as burdensome as income taxes and heavy-handed regulations.