As the US celebrates the 4th July holiday, it often surprises me how much misunderstanding there is about the event which started the whole process of US independence – the Boston Tea Party. Most seem to believe that the Tea Party was caused by an increase in taxation by a colonial power, England. This is not the case as the detail of the story illustrates. Its a tale of tax policy , tax avoidance and smuggling! The story demonstrates that lobbying by big companies isn’t a recent phenomenon. This isn’t a story about Intellectual Property but Tea!
The Tea Act 1773
The Indemnity Act of 1767, which gave the East India Company a refund of the duty on tea that was re-exported to the colonies, expired in 1772.The British Parliament passed a new act in 1772 that reduced this refund, effectively leaving a 10% duty on tea imported into Britain. The act also restored the tea taxes within Britain that had been repealed in 1767, and left in place the three pence Townshend duty in the colonies. With this new tax burden driving up the price of British tea, sales plummeted. The company continued to import tea into Great Britain, however, amassing a huge surplus of product that no one would buy. For these and other reasons, by late 1772 the East India Company, one of Britain’s most important commercial institutions, was in a serious financial crisis. So they lobbied the government.
Eliminating some of the taxes was one obvious solution to the crisis. The East India Company initially sought to have the Townshend duty repealed, but the North government was unwilling because such an action might be interpreted as a retreat from Parliament’s position that it had the right to tax the colonies. More importantly, the tax collected from the Townshend duty was used to pay the salaries of some colonial governors and judges. This was in fact the purpose of the Townshend tax: previously these officials had been paid by the colonial assemblies, but Parliament now paid their salaries.
Another possible solution for reducing the growing mound of tea in the East India Company warehouses was to sell it cheaply in Europe. This possibility was investigated, but it was determined that the tea would simply be smuggled back into Great Britain, where it would undersell the taxed product. The best market for the East India Company’s surplus tea, so it seemed, was the American colonies, if a way could be found to make it cheaper than the smuggled Dutch tea as there was less danger of flow-back into the British market.
The North ministry’s solution was the Tea Act, enacted on May 10, 1773. This act restored the East India Company’s full refund on the duty for importing tea into Britain, and also permitted the company, for the first time, to export tea to the colonies on its own account. This would allow the company to reduce costs by eliminating the middlemen who bought the tea at wholesale auctions in London. Instead of selling to middlemen, the company now appointed colonial merchants to receive the tea on consignment; the consignees would in turn sell the tea for a commission. In July 1773, tea consignees were selected in New York, Philadelphia, Boston, and Charleston.
The Tea Act retained the three pence Townshend duty on tea imported to the colonies. Some members of Parliament wanted to eliminate this tax, arguing that there was no reason to provoke another colonial controversy. But North did not want to give up the revenue from the Townshend tax, primarily because it was used to pay the salaries of colonial officials; maintaining the right of taxing the Americans was a secondary concern.
Even with the Townshend duty in effect, the Tea Act would allow the East India Company to sell tea more cheaply than before, undercutting the prices offered by smugglers. In 1772, legally imported Bohea, the most common variety of tea, sold for about 3 shillings (3s) per pound. After the Tea Act, colonial consignees would be able to sell it for 2 shillings per pound (2s), just under the smugglers’ price of 2 shillings and 1 penny (2s 1d). Realizing that the payment of the Townshend duty was politically sensitive, the company hoped to conceal the tax by making arrangements to have it paid either in London once the tea was landed in the colonies, or have the consignees quietly pay the duties after the tea was sold. This effort to hide the tax from the colonists was unsuccessful.
Resisting the Tea Act
In September and October 1773, seven ships carrying East India Company tea were sent to the colonies: four were bound for Boston, and one each for New York, Philadelphia, and Charleston. In the ships were more than 2,000 chests containing nearly 600,000 pounds of tea. Americans learned the details of the Tea Act while the ships were en route, and opposition began to mount. Whigs began a campaign to raise awareness and to convince or compel the consignees to resign, in the same way that stamp distributors had been forced to resign in the 1765 Stamp Act crisis.
The protest movement that culminated with the Boston Tea Party was not a dispute about high taxes. The price of legally imported tea was actually reduced by the Tea Act of 1773. Protesters were instead concerned with a variety of other issues. The familiar “no taxation without representation” argument, along with the question of the extent of Parliament’s authority in the colonies, remained prominent. Some regarded the purpose of the tax program—to make leading officials independent of colonial influence—as a dangerous infringement of colonial rights.
So the Boston Tea Party was part an ideological protest about taxing rights but mainly in terms of participants an attempt by smugglers to remain in business. Colonial merchants, some of them smugglers, played a significant role in the protests. Because the Tea Act made legally imported tea cheaper, it threatened to put smugglers of Dutch tea out of business. Legitimate tea importers who had not been named as consignees by the East India Company were also threatened with financial ruin by the Tea Act.
So the Boston Tea Party has two conflicting motivations, the claim for states rights in terms of no taxation without representation is clear. But a significant number of the participants were motivated by the reduction of tax which meant that their smuggling operations were being undercut – their protest was not about taxes going up but about them going down! All the more surprising that the “Tea Party” in the US based their protest about taxes going up on event triggered by taxes going down. History takes some surprising turns when it becomes folklore.