Taxation v. Regulation: A Revolutionary Question

What is a tax, and what is a regulation or a penalty? That seems like a fairly straightforward question. But since Chief Justice Roberts released his opinion that Obamacare is constitutional because the “penalty” it imposes for failing to carry health insurance is really a tax, we have seen that it is, in fact, an interesting question.

Few have noted that this question was important in the early stages of the American Revolution. In 1764, Parliament passed the Sugar Act, an act which imposed a tax of three pence per gallon on all foreign molasses imported into the colonies. Actually, it was slightly more complicated than that. The Act reduced the old 6 levy from 6 to 3 pence per gallon, and imposed a duty on other items as well. The act, officially called the “Revenue Act,” set off howls of protest from the colonies. In part, this was simply an objection to the cost. The old Molasses Act of 1733 had been very loosely enforced, and the colonists often evaded it. But there was much more going on.

The Sugar Act was an innovation. The innovation is directly on point for us. This was the first such regulation that was imposed for the purpose of raising revenue, rather than for the purpose of trade regulation. Previously, all such laws that imposed a charge did so to encourage certain behavior, and discourage other behavior. The purpose of imposing a high charge on the importation of foreign molasses was to make its use prohibitively expensive. So too with other such charges imposed by Parliament on trade within the empire. But this tax was created as a tax–its stated purpose was to raise revenue. Others would follow in its wake.

In other words, the Americans distinguished between a tax and a penalty according to the purpose of the law. The nature of the thing was defined by its ends, not the means employed to that end. A cynic might say that Parliament could have avoided all that difficulty if they simply changed the name of the bill, and claimed that the bill, like its predecessor, was designed to promote the purchase of British molasses. But the purpose of the bill, the colonists realized, was not merely a matter of labeling. They held that it was implicit in the structure of the bill itself. In other words, the colonists held that Parliament had the legal right to regulate trade in the empire, but not to impose taxes on colonists who had no representatives in Parliament. Taxation without representation was tyranny.

Like many commentators today, some did not understand the distinction that the colonists were making. To them, raising revenue by law was, by definition, taxation. In his classic book about the American Revolution, The Glorious Cause, Robert Middlekauff notes that George Grenville, the minister who pushed for the Sugar Act, and, a year later, the Stamp Act, “could not ‘understand the difference between external and internal taxes.’ Nor could he understand the difference between legislation and taxation.” The colonists, however, understood the difference completely. A tax raised revenue for the purpose of paying the bills of the government, and any impact it had on the behavior of His Majesty’s subjects was incidental. A regulation existed to control or influence behavior, and any revenue it raised was incidental.

The argument about the Sugar Act grew from an argument about the nature of law, and of government. Tories like Grenville thought that Parliament was sovereign. It had, in the words of the Declaratory Act, the right to make law “in all cases whatsoever.” That being the case, the purpose of a law had no bearing on its legality. There was no inherent limit on government. The colonists disagreed. They thought teleologically about law. That is, they thought about the ends of government. To them, government existed to serve certain purposes, and that its powers were related to those purposes. Personal liberty being impossible without the security of property, taxes could not be raised without one’s consent, or the consent of one’s duly appointed representative. Living in an expansive empire, they were willing to accord Parliament the right to make regulations for the good of the whole, but Parliament had no right to manage the internal affairs of the colonies, or to raise taxes on them without their consent. A couple of decades later, this logic led the Constitutional Convention to decide that all tax bills should originate in the House of Representatives.

Reader Discussion

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on July 04, 2012 at 05:37:37 am

What amazes me is how far we have come over the last 250 years or so in the relationship between an individual citizen and his government in regards to taxes. Today,the amount of a citizen's fruits of their labor that goes directly or indirectly to the government,on all levels,would have created riots in the streets of the 1760s and 70s America. Yet,today most of us would just roll over,work harder and produce more fruits to be picked by the tax authorities. This situation is caused by 3 reasons. 1st. The amount of people in America who are net tax consumers and are traveling on the government gravy train far exceeds the people who are net tax payers and therefor these net tax consumers out vote the productive Economic Class who create the taxable wealth. 2nd. After almost 75 years of propaganda, where citizens are told that the government can solve all our problems if only everyone would pitch in and pay their "fair share," has set up a situation where the productive citizen has over 60% of what they create and produce,directly and or indirectly, taken in the guise of taxation. 3rd. Fear. The fear of God that is put into every productive citizen,by the state, that if they don't turn over their "fair share" of the fruits of their labor that something wicked and evil would be bestowed on that citizen. Fines,penalties,liens,ruined businesses,confiscation of property,jail time or in some cases death. So,in essence, America has come full circle. From tyranny to rebellion,to liberty,to prosperity,to decline and then back to tyranny. What a pity.

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libertarian jerry
on July 05, 2012 at 13:12:13 pm

Mr Samuelson,

A levy on goods is taxation. Whether the levy's purpose is to raise revenue or to discourage certain legal behaviour (a negative externality) is, as Grenville thought, irrelevant. The two (revenue and behaviour) are, certainly from an economic perspective but also a legal one, intrinsically linked. Indeed, so as to raise revenue, one must ascertain the price elasticity of the good or goods in question so as to determine if levying a tax will even raise revenue for the government and, if so, how much.

A penalty is a levy for illegal or prohibited behaviour - it is a fine. Again, the purpose (whether to discourage behaviour or help raise revenue for the government) is irrelevant, though most people would recognise that it is generally both.

I feel it is not worth debating the idea of natural rights and one or two other issues which you relate and contrast to British constitutional theory, for it is bound to be explosive (for most Americans, whether they understand it or not, sign up hook, line and sinker to Lockean rights theory and the ideas of natural justice). I will only point out that the Minister of the Crown mentioned in relation to these ideas, George Grenville, was not a Tory, but a Whig.

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on October 22, 2012 at 02:51:41 am

1961 was nearing the end of the time peroid when our industry had assisted in rebuilding the war-torn world following WWII without real competition. Now, blue collar jobs have real competition (Germany, Sweden, Japan, China, Indonesia, India, etc.) Sometimes competition utilizing slave labor and most without pollution regulatons. Apples and oranges. If we continue to let our industry die, we are imperiling ourselves.A sidetrack not related to this conversation, although I clearly wouldn't be considered pro-labor, I am not a free-marketer either. Our country has what it needs to prosper without assistance. Let's isolate for a bit. Jefferson made the argument that we remain an agrarian society in order to stay out of foreign entanglements. I would modify that to let's just build/grow it ourselves. The foreign governments have been taking advantage of us in regards to trade. Let's not let that happen anymore. Trade war? Sure. They don't want to buy our grain? Sure. Fine. We will sell it to those who do. The demand is there for agricultural commodities and is not going away.

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on October 22, 2012 at 14:29:35 pm

From the article: The idea that the econmoy will suffer if we modestly raise taxes on upper-income Americans is belied by recent history: we increased tax rates on the rich in 1993 and the econmoy created more than twenty-two million jobs; we cut them in 2001 and the econmoy created fewer than seven million jobs. Good point. We all know that the tech bubble burst in 2001 (yeah right). If we are going to assess causation of the bad econmoy strictly to cutting taxes, why did the market tank in The Year of Our Lord 2000? History and facts are an obstacle for tax raisers.

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Law & Liberty welcomes civil and lively discussion of its articles. Abusive comments will not be tolerated. We reserve the right to delete comments - or ban users - without notification or explanation.