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.