"No Taxation without Representation," was a major rallying cry of the American Revolution. At the heart of it was the fact that Colonial Americans had absolutely no say in the legislation process that created taxes.
I have often wondered what our early Founders did toward taxation after the Revolution, yet never had the time to really research it or had access to the documents to find out.
The Internet is an incredible invention -- vast amounts of material is available at a moment's notice. One resource is the entire Annals of Congress, from 1774 to 1875, preserved by the Library of Congress and freely available online.
It is through these resources that we can learn what the Founders actually did once they had the power of representing the people -- and it really shouldn't surprise us that it's a lot different than our history tends to portray.
The Tea Act of 1773
Probably one of the most despised laws leading up to the Revolution, the Tea Act of 1773 set the groundwork for the Boston Tea Party and was included among the Intolerable Acts.
The British East India Company was struggling due to British wars, various crop failures in India, and smuggling. Smuggling had caused a glut in supply, with the Company having over 18 million pounds of tea on hand in its warehouses unsold.
The British East India Company, a Royal Charter company, was paying the British government fees in the multi-millions of pounds per year (some estimates as high as 400 million at times) -- it was literally too big to fail.Taxes on British tea throughout the Empire had been historically high, around 30-pence per pound. This led to an exceedingly lucrative business in the colonies (and elsewhere) of smuggling Dutch tea, a cheaper, but inferior product.
The Parliament's answer to the problemL cut taxes. And not just a small tax cut, but a huge one. It was far easier to give up the 2.25 million pounds in expected tax than to risk the East India Company going under.
The Tea Act eliminated all duty taxes for tea brought into England, but left in place the widely-unpopular Townshend Duties for the colonies. The Townshend duty on tea: 3 pennies per pound.
The overall effect: British tea (even with the Townshend Duties) was now cheaper than smuggled Dutch tea.
This, like almost anything, can be viewed multiple ways. The Patriots rallied around the fact of not wanting to pay a tax that others did not have to pay -- but it can also be seen as anger against losing huge smuggling profits.
Benjamin Franklin had lobbied with British lawmakers for an Empire-wide 3 penny per pound tax on tea -- even though he got his target for the colonies, it was still seen as unjust.
To Franklin, some of this perceived injustice came from the fact that the East India Company still controlled distribution. Many colonial businessmen, however, wanted to circumvent the Company and have direct trade with India and China -- which really had nothing to do with the tax itself.
In a story that all American children know by heart, a group of Patriots dressed as Indians threw the tea overboard -- about $1 million worth in today's currency.
The First Congress, March 1789
The first session of the House of Representatives opened in March 1789, but wasn't able to form a quorum until April. The first business was to select a speaker and set up the first House rules. But on April 8, the House turned to figuring out how to fund the new government.
One of the biggest weaknesses of the Articles of Confederation was the inability of the government to levy taxes -- the newly seated government jumped at the chance to use this new ability.A very long list of items to be taxed (as import duties) was introduced, but interesting items (including the first discussed) were rum, distilled spirits, wine, sugar, molasses, tea, and coffee.
Import duties have a two-fold purpose. First, it protects domestically produced products by increasing the prices of imported goods. Second, and more importantly to the new government, it provides revenue.
The discussion was lengthy and at times exceedingly confusing. Some of the representatives used the newer (though not yet employed) system of decimalization, while others used the standard pound sterling terminology for the debate.
The resolutions and final laws were all written in the new decimalization format: as cents and dollars. At this time, the American cent and British pence were almost equivalent in value.
Rum, spirits, and wine were all produced domestically -- having high taxes on these items made a lot of sense. But molasses, sugar, tea, and coffee had no domestic alternative, and the debate on these is nothing short of amazing.
On the taxation of rum, James Madison was all for using the power of taxation to its maximum advantage:
"I would tax with as high a duty as can be collected...it is the sense of the people of America that this article should have a duty imposed on it weighty indeed... The question then is, whether the highest sum can be collected? I am of the opinion that higher duties may generally be collected under the government of the Union than could be under that of the particular States." -- pg 132, Annals of Congress
Madison went further and suggested that molasses, the primary ingredient of rum, should be taxed at 8 cents per gallon (8 times the colonial amount, according to Rep. John Laurance from New York), which Benjamin Goodhue of Massachusetts noted would become one-half of the wholesale price of molasses. A 50 percent tax!
The rum tax had already passed at 30 percent -- Goodhue saw rum as a luxury and agreed with its tax, but didn't understand a tax of 50 percent on a necessity.
Fisher Ames, also of Massachusetts, had a fiery speech. The record noted that he stated:
"...he considered a necessity of life, and would never consent to tax it fifty per cent, upon its value, nor did he believe any other gentleman would, if he considered that the tax would operate more against the poor than the rich, because the poor were the principal consumers of the article" -- pg 142, Annals of Congress
We seem to have a myth in modern politics that the taxation divide between the rich and poor is a new phenomenon. Yet, even in the very first Congress it was a matter of heated debate.
The measure passed the House as a tax of 6 cents per gallon -- still a 43 percent tax.
The measure on tea was tabled twice, probably because the Founders knew it was going to be a political nightmare.After much debate, tea was taxed at 6 cents a pound (green tea at 15 cents per pound) -- twice the rate of taxation that caused the Boston Tea Party. Coffee was taxed at only 2 1/2 cents per pound, which is probably why we are now a nation of coffee drinkers.
The modern tea party movement would be aghast at any attempt to double taxes (or even slightly raise them) in America, but the Founding Fathers did just that on many items. Like it or not, it costs money to run a government, and the options available are either to tax or to borrow.
The final bill, our nation's first major piece of legislation -- passed by both houses of Congress and signed by President Washington -- became known as the Tariff Act of 1789. The tax on molasses was severely dropped by the Senate, with the final tax being 2 1/2 cents per gallon (a 24 percent tax).
The tax on tea was increased by the Senate and became the first punitive trade measure in the nation's history. Teas from China or India were taxed at 6 to 20 cents per pound, depending on variety. Teas imported from Europe were taxed at 8 to 45 cents per pound, thereby encouraging direct trade with China and India.
And while designed to last until 1796, the Tariff Act of 1789 only lasted one year, replaced by the Tariff Act of 1790 with much higher taxes. The government didn't collect enough revenue the first year and our Founding Fathers did the only thing they could -- they raised taxes.
There's an important lesson to be taken from this; sometimes taxation with representation comes with a higher price tag.
Image: Fisher Ames