Chapter 2

Taxes

The following is excerpted from "An Outline of American History" of the United States Information Agency (USIA).

"More serious in its repercussions was the new financial policy of the British government, which needed more money to support its growing empire. Unless the taxpayer in England was to supply all money for the colonies' defense, revenues would have to be extracted from the colonists through a stronger central administration, which would come at the expense of colonial self-government.

The first step in inaugurating the new system was the replacement of the Molasses Act of 1733, which placed a prohibitive duty, or tax, on the import of rum and molasses from non-English areas, with the Sugar Act of 1764. This act forbade the importation of foreign rum; put a modest duty on molasses from all sources and levied duties on wines, silks, coffee and a number of other luxury items. The hope was that lowering the duty on molasses would reduce the temptation to smuggle it from the Dutch and French West Indies for processing in the rum distilleries of New England. To enforce the Sugar Act, customs officials were ordered to show more energy and effectiveness. British warships in American waters were instructed to seize smugglers, and "writs of assistance," or warrants, authorized the king's officers to search suspected premises.

Both the duty imposed by the Sugar Act and the measures to enforce it caused consternation among New England merchants. They contended that payment of even the small duty imposed would be ruinous to their businesses. Merchants, legislatures and town meetings protested the law, and colonial lawyers found in the preamble of the Sugar Act the first intimation of "taxation without representation," the slogan that was to draw many to the American cause against the mother country.

Later in 1764, Parliament enacted a Currency Act "to prevent paper bills of credit hereafter issued in any of His Majesty's colonies from being made legal tender." Since the colonies were a deficit trade area and were constantly short of hard currency, this measure added a serious burden to the colonial economy. Equally objectionable from the colonial viewpoint was the Quartering Act, passed in 1765, which required colonies to provide royal troops with provisions and barracks.

STAMP ACT

The last of the measures inaugurating the new colonial system sparked the greatest organized resistance. Known as the "Stamp Act," it provided that revenue stamps be affixed to all newspapers, broadsides, pamphlets, licenses, leases or other legal documents, the revenue (collected by American customs agents) to be used for "defending, protecting and securing" the colonies.

The Stamp Act bore equally on people who did any kind of business. Thus it aroused the hostility of the most powerful and articulate groups in the American population: journalists, lawyers, clergymen, merchants and businessmen, North and South, East and West. Soon leading merchants organized for resistance and formed non-importation associations.

Trade with the mother country fell off sharply in the summer of 1765, as prominent men organized themselves into the "Sons of Liberty" -- secret organizations formed to protest the Stamp Act, often through violent means. From Massachusetts to South Carolina, the act was nullified, and mobs, forcing luckless customs agents to resign their offices, destroyed the hated stamps.

Spurred by delegate Patrick Henry, the Virginia House of Burgesses passed a set of resolutions in May denouncing taxation without representation as a threat to colonial liberties. The House of Burgesses declared that Virginians had the rights of Englishmen, and hence could be taxed only by their own representatives. On June 8, the Massachusetts Assembly invited all the colonies to appoint delegates to the so-called Stamp Act Congress in New York, held in October 1765, to consider appeals for relief from the king and Parliament. Twenty-seven representatives from nine colonies seized the opportunity to mobilize colonial opinion against parliamentary interference in American affairs. After much debate, the congress adopted a set of resolutions asserting that "no taxes ever have been or can be constitutionally imposed on them, but by their respective legislatures," and that the Stamp Act had a "manifest tendency to subvert the rights and liberties of the colonists."

TAXATION WITHOUT REPRESENTATION

The issue thus drawn centered on the question of representation. From the colonies' point of view, it was impossible to consider themselves represented in Parliament unless they actually elected members to the House of Commons. But this idea conflicted with the English principle of "virtual representation," according to which each member of Parliament represented the interests of the whole country, even the empire, despite the fact that his electoral base consisted of only a tiny minority of property owners from a given district. The rest of the community was seen to be "represented" on the ground that all inhabitants shared the same interests as the property owners who elected members of Parliament.

Most British officials held that Parliament was an imperial body representing and exercising the same authority over the colonies as over the homeland. The American leaders argued that no "imperial" Parliament existed; their only legal relations were with the Crown. It was the king who had agreed to establish colonies beyond the sea and the king who provided them with governments. They argued that the king was equally a king of England and a king of the colonies, but they insisted that the English Parliament had no more right to pass laws for the colonies than any colonial legislature had the right to pass laws for England.

The British Parliament was unwilling to accept the colonial contentions. British merchants, however, feeling the effects of the American boycott, threw their weight behind a repeal movement, and in 1766 Parliament yielded, repealing the Stamp Act and modifying the Sugar Act. However, to mollify the supporters of central control over the colonies, Parliament followed these actions with passage of the Declaratory Act. This act asserted the authority of Parliament to make laws binding the colonies "in all cases whatsoever."

TOWNSHEND ACTS

The year 1767 brought another series of measures that stirred anew all the elements of discord. Charles Townshend, British chancellor of the exchequer, was called upon to draft a new fiscal program. Intent upon reducing British taxes by making more efficient the collection of duties levied on American trade, he tightened customs administration, at the same time sponsoring duties on colonial imports of paper, glass, lead and tea exported from Britain to the colonies. The so-called Townshend Acts were based on the premise that taxes imposed on goods imported by the colonies were legal while internal taxes (like the Stamp Act) were not.

The Townshend Acts were designed to raise revenue to be used in part to support colonial governors, judges, customs officers and the British army in America. In response, Philadelphia lawyer John Dickinson, in Letters of a Pennsylvania Farmer, argued that Parliament had the right to control imperial commerce but did not have the right to tax the colonies, whether the duties were external or internal.

The agitation following enactment of the Townshend duties was less violent than that stirred by the Stamp Act, but it was nevertheless strong, particularly in the cities of the Eastern seaboard. Merchants once again resorted to non-importation agreements, and people made do with local products. Colonists, for example, dressed in homespun clothing and found substitutes for tea. They used homemade paper and their houses went unpainted. In Boston, enforcement of the new regulations provoked violence. When customs officials sought to collect duties, they were set upon by the populace and roughly handled. For this infraction, two British regiments were dispatched to protect the customs commissioners.

The presence of British troops in Boston was a standing invitation to disorder. On March 5, 1770, antagonism between citizens and British soldiers again flared into violence. What began as a harmless snowballing of British soldiers degenerated into a mob attack. Someone gave the order to fire. When the smoke had cleared, three Bostonians lay dead in the snow. Dubbed the "Boston Massacre," the incident was dramatically pictured as proof of British heartlessness and tyranny.

Faced with such opposition, Parliament in 1770 opted for a strategic retreat and repealed all the Townshend duties except that on tea, which was a luxury item in the colonies, imbibed only by a very small minority. To most, the action of Parliament signified that the colonists had won a major concession, and the campaign against England was largely dropped. A colonial embargo on "English tea" continued but was not too scrupulously observed. Prosperity was increasing and most colonial leaders were willing to let the future take care of itself.

SAMUEL ADAMS During a three-year interval of calm, a relatively small number of radicals strove energetically to keep the controversy alive, however. They contended that payment of the tax constituted an acceptance of the principle that Parliament had the right to rule over the colonies. They feared that at any time in the future, the principle of parliamentary rule might be applied with devastating effect on all colonial liberties.

The radicals' most effective leader was Samuel Adams of Massachusetts, who toiled tirelessly for a single end: independence. From the time he graduated from Harvard College in 1740, Adams was a public servant in some capacity -- inspector of chimneys, tax-collector and moderator of town meetings. A consistent failure in business, he was shrewd and able in politics, with the New England town meeting his theater of action.

Adams's goals were to free people from their awe of social and political superiors, make them aware of their own power and importance and thus arouse them to action. Toward these objectives, he published articles in newspapers and made speeches in town meetings, instigating resolutions that appealed to the colonists' democratic impulses.

In 1772 he induced the Boston town meeting to select a "Committee of Correspondence" to state the rights and grievances of the colonists. The committee opposed a British decision to pay the salaries of judges from customs revenues; it feared that the judges would no longer be dependent on the legislature for their incomes and thus no longer accountable to it -- thereby leading to the emergence of "a despotic form of government." The committee communicated with other towns on this matter and requested them to draft replies. Committees were set up in virtually all the colonies, and out of them grew a base of effective revolutionary organizations. Still, Adams did not have enough fuel to set a fire.

BOSTON "TEA PARTY"

In 1773, however, Britain furnished Adams and his allies with an incendiary issue. The powerful East India Company, finding itself in critical financial straits, appealed to the British government, which granted it a monopoly on all tea exported to the colonies. The government also permitted the East India Company to supply retailers directly, bypassing colonial wholesalers who had previously sold it. After 1770, such a flourishing illegal trade existed that most of the tea consumed in America was of foreign origin and imported, illegally, duty- free. By selling its tea through its own agents at a price well under the customary one, the East India Company made smuggling unprofitable and threatened to eliminate the independent colonial merchants at the same time. Aroused not only by the loss of the tea trade but also by the monopolistic practice involved, colonial traders joined the radicals agitating for independence.

In ports up and down the Atlantic coast, agents of the East India Company were forced to resign, and new shipments of tea were either returned to England or warehoused. In Boston, however, the agents defied the colonists and, with the support of the royal governor, made preparations to land incoming cargoes regardless of opposition. On the night of December 16, 1773, a band of men disguised as Mohawk Indians and led by Samuel Adams boarded three British ships lying at anchor and dumped their tea cargo into Boston harbor. They took this step because they feared that if the tea were landed, colonists would actually comply with the tax and purchase the tea. Adams and his band of radicals doubted their countrymen's commitment to principle.

A crisis now confronted Britain. The East India Company had carried out a parliamentary statute, and if the destruction of the tea went unpunished, Parliament would admit to the world that it had no control over the colonies. Official opinion in Britain almost unanimously condemned the Boston Tea Party as an act of vandalism and advocated legal measures to bring the insurgent colonists into line.

The following is excerpted from "The Economics of Taxation" of the Treasury Dept's Office of Public Correspondence.

TAXES IN THE UNITED STATES

Governments pay for these services through revenue obtained by taxing three economic bases: income, consumption and wealth. The Federal Government taxes income as its main source of revenue. State governments use taxes on income and consumption, while local governments rely almost entirely on taxing property and wealth.

Taxes on Income

The earnings of both individuals and corporations are subject to income taxes. Most of the Federal Government's revenue comes from income taxes. The personal income tax produces about five times as much revenue as the corporate income tax.

Not all income tax taxed in the same way. For example, taxpayers owning stock in a corporation and then selling it at a gain or loss must report it on a special schedule. This item and any other gains or losses get calculated separately before they get added to other income. By comparison, the interest they earn on money in a regular savings account gets included with wages, salaries and other "ordinary" income. There are also many types of tax-exempt and tax-deferred savings plans available that impact on people's taxes.

Payroll taxes are an important source of revenue for the Federal Government. Employers are responsible for paying these taxes, which include social security insurance and unemployment compensation. Employees also pay into the social security program through money withheld from their paychecks. Some state governments also use payroll taxes to pay for the state's unemployment compensation programs.

Over the years, the amount paid in social security taxes has greatly increased. This is because there are fewer workers paying into the system for each retired person now receiving benefits. Today, some workers pay more social security tax than income tax.

Taxes on Consumption

The most important taxes on consumption are sales and excise taxes. Sales taxes usually get paid on such things as cars, clothing and movie tickets. Sales taxes are an important source of revenue for most states and some large cities and counties. The tax rate varies from state to state, and the list of taxable goods or services also varies from one state to the next.

Excise taxes, sometimes called "luxury taxes," are used by both state and Federal Governments. Examples of items subject to Federal excise taxes are heavy tires, fishing equipment, airplane tickets, gasoline, beer and liquor, firearms, and cigarettes.

The objective of excise taxation is to place the burden of paying the tax on the consumer. A good example of this use of excise taxes is the gasoline excise tax. Governments use the revenue from this tax to build and maintain highways, bridges, and mass transit systems. Only people who purchase gasoline -- who use the highways -- pay the tax.

Some items get taxed to discourage their use. This applies to excise taxes on alcohol and tobacco. Excise taxes are also used during a war or national emergency. By raising the cost of scarce items, the government can reduce the demand for these items.

Taxes on Property and Wealth

The property tax is local government's main source of revenue. Most localities tax private homes, land, and business property based on the property's value. Usually, the taxes get paid monthly along with the mortgage payment. The one who holds the mortgage, such as a bank, holds the money in an "escrow" account. Payments then get made for the property owner.

Some state and local governments also impose taxes on the value of certain types of "personal" property. Examples of personal property often taxed are cars, boats, recreational vehicles, and livestock.

Property taxes account for more than three-fourths of the revenue raised through taxes on wealth. Other taxes imposed on wealth include inheritance, estate, and gift taxes.

THE FEDERAL INCOME TAX

A basic principle underlying the income tax laws of the United States is that people should be taxed according to their "ability to pay." Taxpayers with the same total income may not have the same ability to pay. Those with high medical bills, mortgage interest payments, or other allowable expenses can subtract these amounts as "itemized deductions" to reduce their taxable incomes. Similarly, taxpayers may subtract a certain amount on their tax returns for each allowable "exemption." By lowering one's taxable income, these exemptions and deductions support the basic principle of taxing according to ability to pay.

Those with high taxable incomes pay a larger percentage of their income in taxes. This percentage is the "tax rate." Since those with higher taxable incomes pay a higher percentage, the Federal income tax is a "progressive" tax.

Sales and excise taxes, by comparison, are considered "regressive." Since the goods get taxed at the same percentage, those with lower incomes pay a larger percentage of their income in sales and excise taxes. Federal income taxes are collected on a "pay-as-you-go" withholding system. Most employers must withhold taxes from their employees' paychecks and send the money for deposit into the General Fund of the Treasury. Self-employed individuals and businesses must pay their taxes in regular installments, known as estimated tax payments. Paying taxes through withholding or estimated taxes during the year helps reduce the government's expense for borrowing money. It also provides an easier method for taxpayers to pay their taxes. To keep collection costs down, the Internal Revenue Service expects all taxpayers to comply with the law voluntarily. Most taxpayers figure out how much tax they are supposed to pay and file their income tax return by the date it is due. Without this voluntary compliance, it would cost the Internal Revenue Service a great deal more to collect the same amount of revenue.

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