Foreign investors are exploiting a U.S. tax loophole by underwriting American lawsuits, paying significantly lower tax rates, or none at all, on their winnings, according to Paul Teller in a Fox News opinion piece. Treasury Secretary Scott Bessent has criticized this practice, calling it "a malignancy" on the judicial system.
Under this scheme, foreign sovereign wealth funds or investment funds finance the costs of lawsuits, often on the plaintiff's side. When a lawsuit results in a financial award, the winnings are typically taxed as ordinary income for the American plaintiff. However, the foreign financier's share, determined by contract, can be treated as a capital gain, taxed at a lower rate. Crucially, foreign investors generally owe no U.S. tax on capital gains derived from American sources, meaning their effective tax rate can be zero, while the American litigant pays higher ordinary income tax rates.
Teller argues that this practice is unfair, drains money from the U.S. economy, and contributes to higher prices for American consumers. He contends that the preferential tax treatment, intended to reward domestic investment and economic growth, is being used by foreign entities to profit from litigation rather than productive enterprise.
Treasury Secretary Bessent has publicly criticized the practice, noting that these foreign financiers are avoiding U.S. taxes entirely. Teller suggests that Congress should act to close this "un-American, abusive loophole" this year, ideally through a reconciliation bill, and redirect the resulting revenue toward pro-growth tax relief for Americans. If legislative action is not taken, Teller proposes that the White House, working with Bessent, should explore executive actions to address the issue.
"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," Teller wrote.