America has become too litigious. Even the slightest wrong seems to yield a lawsuit these days, lining the pockets of trial attorneys who profit from pitting Americans against Americans. But did you know that a new brand of lawsuit has emerged in recent years that has foreigners fueling the litigation and then taking the winnings at a lower — or even zero — tax rate?
That’s not fair and needs to stop.
Here’s how it works. A foreign sovereign wealth fund or other investment fund overseas eyes a potential or existing lawsuit in the United States and speculates that it could earn a significant financial return by contracting with one party, often the plaintiff’s side, to underwrite the large and growing costs of the lawsuit. When the plaintiff receives a financial reward from the court, the winnings tend to be taxed as ordinary income (i.e., at a higher rate).
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But when the foreign underwriter that financed that same lawsuit collects its share of the winnings (decided in advance as a condition of funding the lawsuit), that money can be treated as a capital gain and therefore taxed at a lower rate than the plaintiff herself pays. And since foreign investors generally owe no U.S. tax on capital gains from American sources, the tax rate for the foreigner is often zero, even as the American plaintiff pays the ordinary income tax rate.
Again — not fair and needs to stop.
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Recently, in a Capitol Hill hearing, Treasury Secretary Scott Bessent sharply criticized this scheme of foreigners fueling American lawsuits and running away with a greater share of the winnings. Bessent is exactly right: Foreign financing of American lawsuits is indeed “a malignancy” on our judicial system, as he called it, that is draining money out of the U.S. economy, driving up prices across the board for American consumers and further encouraging litigiousness in American society.
As the secretary noted, these foreign financiers are asserting preferential tax treatment, avoiding U.S. taxes entirely and getting away with it. The result: American taxpayers are in fact subsidizing a practice that is driving up costs for American businesses and fostering higher prices for all Americans at the grocery store and at the pump.
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Unbelievable!
What’s particularly offensive about this practice is that the impetus behind the capital gains tax rate being lower than the ordinary income tax rate on the same amount of money is the wholeheartedly American desire to reward risk-taking investment aimed at production and growth. But the foreign hedge funds and other international wealth funds that underwrite American lawsuits at the lower or zero tax rate are not investing in economic growth. Quite the opposite. They are seeking to profit from the restraint of growth, from lawsuits that siphon resources from the profit margins and bottom lines of American producers.
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Outrageous!
Congress should close this un-American, abusive loophole this year and put the billions of dollars in increased revenue toward pro-growth tax relief in America. In typical Beltway fashion, some politicos will assert that there’s not enough time to make this fix this year. That’s inaccurate. Right now, Congress is scheduled to be in session for at least five more weeks this calendar year, and there is room in the calendar to schedule additional days and (God forbid!) late nights in session. Yes, this might mean coming back to the office after scurrying around town to lavish holiday parties, but so be it. This issue is worth it.
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Many in Congress, including House Republican leaders, have said that this year they want to pass another “reconciliation” bill (a special type of legislation not subject to the Senate filibuster, regarding revenues going in and out of the Treasury). That would be the ideal legislative vehicle in which to fix this foreign loophole and direct the resulting revenues back to the American taxpayer.
But if Congress can’t get its act together soon, the White House should work with Bessent to see what actions the executive branch may legally take on its own to address this boon for foreign financiers.
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Either way, this would be an easy win for American consumers and businesses, while defunding left-wing trial attorneys who continue to enrich themselves on the backs of excessive lawsuits.
Let’s get this done.