It’s well known that frivolous lawsuits cost billions of dollars each year, but few people know about a shadowy subset of financiers — sometimes overseas — who are intensifying the problems in America’s legal system. A loophole in today’s tax code effectively allows third parties to rake in money from lawsuits with little to no tax liability.
This is the third-party litigation funding loophole, and it’s time to end it. Crazy as it sounds, the judicial system currently allows billionaires to fund lawsuits in which they aren’t the victims, without any disclosures or conflict-of-interest statements, and their payouts are structured as capital gains, not regular income, yielding a big tax break.
The financiers behind these lawsuits are paying taxes at a reduced rate while the actual victims in these court cases are hammered by a top marginal rate of 37% plus a 3.8% surcharge. For those who are “investing” in TPLF schemes, the return on investment is often 100% or more.
This kind of judicial speculation is fundamentally just a wager on someone else’s court case, almost like what happens on the betting sites Kalshi and Polymarket. Of course, profits from this kind of gambling are taxed as regular income, not capital gains, which incentivizes TPLF.
And the cost of this litigation is adding up, not only in the form of more and larger lawsuits but also a “tort tax” that imposes higher costs on consumers and businesses, especially for insurance. A study from last December found that TPLF is responsible for $35.8 billion in direct economic losses each year.
This is downright malicious compliance with the tax code, in the most self-serving way possible. Capital gains are supposed to be for productive investment that increases economic activity and supports supply-side growth, so we tax them at a lower rate. TPLF, on the other hand, is precisely the opposite.
Allowing this outside financing has created a subsidized racket that’s already a $20 billion industry and is expected to balloon to about $50 billion over the next decade. This isn’t free enterprise, but crony capitalism via subsidies in the tax code. Worse, some of the biggest beneficiaries aren’t even American or are bad actors here in the United States.
Take George Soros and his Open Society Foundation, along with the Soros Economic Development Fund. Using these vehicles, Soros invested in Aristata Capital, a TPLF firm chasing “social and environmental change” with “attractive financial returns.”
In other words, these dark-money firms backed climate lawsuits and policy-shifting cases for profit. It’s well-known that Soros has been financing judicial races across the country in pursuit of his left-wing agenda, but few know he’s also trying to use lawsuits to remake America in his image.
But unlike when he spends money on a judicial race, these lawsuits allow him and others to advance their agenda while turning a profit and dodging personal income taxes.
Similarly, sovereign wealth funds and hedge funds from abroad can back U.S. lawsuits, rake in verdict profits, and often pay zilch in American taxes. Forget the lower capital gains rate — these people aren’t paying anything at all. Meanwhile, the American plaintiff shoulders the full tax burden. That’s not justice; it’s exploitation.
The TPLF loophole incentivizes junk science, witness coaching, and forum-shopping, turning courthouses into profit mills, not halls of justice. Trial lawyers love it because it funds their war chests, but the rest of us suffer. Small businesses get sued into oblivion, innovation stalls under legal threats, and consumers pick up the tab.
Remember the asbestos litigation bonanza or the opioid settlements? TPLF turns legitimate grievances into supercharged nonsense, with funders taking up to 50% of awards before plaintiffs see a dime. Enough is enough.
We need a legislative hammer to smash this racket, and Rep. Kevin Hern’s (R-OK) Tackling Predatory Litigation Funding Act is a great start. It’s a smart, targeted fix that taxes TPLF profits at the top marginal personal rate plus the net investment income surcharge, plugging the loophole.
It applies only to third-party funders with financing deals over $10,000, sparing lawyers, direct parties, or simple loans. No more tax shields for speculators; ordinary income treatment levels the field. This isn’t government overreach — it’s restoring integrity to our tax code and courts.
Thankfully, Hern’s legislation was referred to the House Ways and Means Committee, under the stewardship of Chairman Jason Smith (R-MO), a true tax reform champion who has led the fight in closing loopholes that distort markets.
RESTORING AMERICA: CHINA IS WINNING THE TRUCKING ARMS RACE
Hern’s Tackling Predatory Litigation Funding Act is exactly the kind of smart, targeted fix we need. Under Smith’s guidance, this bill has a real shot at dismantling a multibillion-dollar scam masquerading as a legitimate investment.
It’s one thing to cut taxes on productive activity to increase economic growth, but that’s not the same thing as a special interest carveout. Conservatives should want low tax rates and a broad tax base to maximize revenue while minimizing economic distortions, such as those caused by the current law TPLF. Americans deserve fairness in the tax code and in court.
Stephen Moore is a former senior Trump economic adviser and co-founder of Unleash Prosperity.
