Let me say publicly that DonBoy’s answer exudes a combination of intuitive genius and confidence that make me think DonBoy is going to do big things in his life. -- Steven D. Levitt (Freakonomics blog)
Monday, December 06, 2004
Calling a Tail a Leg

From the manipulators who turned the estate tax into the "death tax": tort "reform" -- already a misnomer -- will become a campaign against the "litigation tax". This from Glenn Hubbard, tonight on NPR's
Marketplace [audio link], but earlier, substanially the same, in Business Week this past August, here. Highlights from the print version:
President Bush's Council of Economic Advisers estimated in 2002 that the U.S. tort system's direct costs total about $180 billion a year.
[In Business Week's author bio info:] Glenn Hubbard is dean of Columbia Business School. He chaired the Council of Economic Advisers from February, 2001, to March, 2003, and is an informal adviser to the Bush Administration.
So that first sentence is Hubbard quoting himself for added credibility. Also note this -- I've juxtaposed the two points to highlight the contradiction, but neither is taken out of context:
[$180 billion] is likely a conservative estimate: It ignores the many economic distortions that arise as individuals and companies try to avoid lawsuits. Examples include defensive medicine and decisions by manufacturers to remove products from the market.
From an economic perspective, tort costs are a pure burden on companies -- a cost with no corresponding benefit. That's because punitive damages are random and fail to provide incentives to companies, many empirical researchers in law and economics have concluded.
So the threat of lawsuits does not provide "incentives" -- reasons to do things, or avoid doing things -- but they waste companies' money because of the all the things those companies do, or avoid doing, in order to not get sued.

Anyway, here's the payoff:
The burden on the economy is large. According to the CEA, if it were borne just by workers, litigation costs would be equivalent to 2.1% of wages and salaries. If the "tax" were borne by consumers, it would be equivalent to a tax on income from savings of 3.1%.
Hold on -- a tax on income from savings? You mean, if you compare this randomly assessed cost with the money I earn on bank interest or the equivalent, it's a whopping 3.1%? Wow. Now, if you were to tell me that it's 3.1% of my income, or even 3.1% of my savings, you might have something...but you didn't, although if I wasn't reading carefully, it kind of sounds like you did, doesn't it?

But my main point can be found in an apocryphal Abraham Lincoln story:
Lincoln says to his straight man, "If you call a tail a leg, how many legs does a dog have?"

Answers the patsy, "Five."

To which Mr. Lincoln responds: "No, four.
Calling a tail a leg does not make it a leg."
Maybe they decided "tort reform" just wasn't working. But calling it a "tax" frames it even more duplicitously. And it might work.

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