Trial Lawyer Deduction: Stimulating More Lawsuits, Fewer Jobs

As the American Association for Justice works with Treasury to circumvent Congress and gain a tax deduction for contingency fee litigation (see post below), it’s important to realize how damaging to jobs creation such a tax break could be.

Victor Schwartz and Chris Appel of Shook, Hardy & Bacon wrote a briefing paper on the issue last year for the Washington Legal Foundation, “Federal Government Bailout for Trial Lawyers.” They explain:

How Plaintiff’s Lawyers Weigh Whether to Bring a Case. Those who practice plaintiffs’ lawyer work learn quickly that it is a business similar to other capital businesses. Capital is placed at risk and a judgment is made whether or not it will bring a profit. Today the costs of litigation act as a curb against marginal and frivolous litigation. This is what makes the plaintiffs’ lawyers’ tax proposal of such great practical importance. While one cannot calculate it mathematically, having the federal government bear 40% of the initial costs allows plaintiff’s attorneys to take more cases with higher risks. The result to industries targeted by plaintiffs’ lawyers will be staggering.

The activity of the contingency fee lawyer is also not like other businesses. It is a business that threatens other businesses with major lawsuits and is directed at using every possible weapon to settle those lawsuits. Under the present legal system, additional weaponry in the plaintiffs’ bar is not needed. To the contrary, additional weaponry is needed to stop marginal litigation and frivolous claims. Some of that marginal litigation is highly likely to be directed at financial institutions, potentially reducing those companies’ capital at the very time the federal government’s policy is to increase it.

That was written in May 2009 but applies just as well today.

There’s also a timely political angle. If you ever doubted how unpopular the litigation industry is, just look how much effort the trial lawyers and Democratic Senators went to keeping this weekend’s fundraiser in Vancouver, B.C., quiet. Republican campaign operatives certainly thought the news was damaging.

Follow these hits with a special-interest tax ruling from Treasury, and you can create a major political story all the way through November.

To summarize: A tax break for trial lawyers would be damaging to the economy and damaging to supporters’ political prospects. On the plus side, it might inspire the major media to pay more attention to one of the most politically powerful special interests, trial lawyers, and their lobbying arm, the American Association for Justice.

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