Hawaii Housing Authority v. Midkiff & the Function of Eminent Domain

Law Market Economics Eminent Domain Property
Eminent Domain

One of the most enduring myths about government in the United States is the idea that governmental behavior is more or less congruent with standards of individual morality. In other words, most Americans believe that government authority is shaped and ruled by the same moral standards which shape and rule the behavior of the average individual. Governmental behavior may have special leeway in a few instances, but for the most part it is constrained by the same principles which constrain the typical man on the street.

This idea, while not without foundation, falls well short of capturing the truth. What most people do not realize is that governmental morality is based on processes which are altogether different from those which form the basis for the morality of the individual. Individual morality is based on reciprocity, the classic notion of “give and take”: we refrain from damaging our neighbor’s property or stealing goods from our friends because we expect this same kind of treatment in return. Individual morality is an exchange, it stems from the basic idea that whatever action or inaction we take will be reciprocated by whoever is affected.

And because our government is nothing other than a massive collection of individuals, many people assume that governmental behavior must be based on this same principle. In reality, however, this is not the case, because our government does not take part in the sort of interactions in which the individual takes part. Instead of reciprocity, government behavior is based on reason, it derives from a wholly rational process involving the weighing of pros and cons and the careful analysis of possible outcomes. A good deal of the confusion about government would quickly disappear if this fact were realized.

There are various ways to show that this is an accurate statement; today, we will use the concept of eminent domain to prove our case. Relatively few property owners are aware that the government has the constitutionally conferred power to confiscate private property, and that the exercise of this power is not limited strictly to times of war. Denuded of its lofty name, eminent domain is simply a forcible acquisition of the sort which would be punishable if committed by an individual citizen. Of course, this does not speak to its propriety, but only illustrates the fact that governmental behavior operates according to different rules. Let’s take a peek at the case of Hawaii Housing Authority v. Midkiff (1984) to get a sense of the contours of eminent domain.


On the island of Oahu, 22 landowners held 72.5 percent of the land titles. This oligopoly led to a distorted market which involved inflated prices and general social discontent. One landowner (the Bishop Estates) held an unusually large portion of land. The Hawaii Legislature passed a measure designed to redistribute the lots held by the Bishop Estates to their corresponding lessees. The legislature reasoned that this transfer of ownership was in the best interests of the entire community. The measure was brought before the Supreme Court of the United States in order to determine its constitutionality.


The doctrine of eminent domain arises from the Fifth Amendment to the U.S. Constitution. According to the so-called “public use doctrine,” the government has the ability to transfer title of ownership if such a transfer serves a legitimate public good.


In an 8-0 (unanimous) decision, the Supreme Court of the United States ruled that the measure adopted by the Hawaii Legislature was constitutionally valid. The court’s decision of this case was significant because the legislature did not transfer the title of the land to the “public,” but to a larger share of private homeowners. However, though this was the case, the court determined that the legislature’s invocation of eminent domain was valid because the correction of the market conferred a substantial benefit to the general public. In other words, in order for eminent domain to be invoked, private land does not have to be put specifically to public use; it only has to confer a clear benefit to the wider populace.

Of course, circumstances will rarely compel the typical homeowner to master the finer points of eminent domain; but it is still important for virtually every homeowner – and nearly every citizen, for that matter – to have at least a basic understanding of this concept. As citizens, we have to be aware of all the functions of our government, not just those which are the most visible or common. Eminent domain may not dominate the headlines of our most popular media, but as we’ve seen it is still remarkably important.

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In addition to a knowledge of eminent domain, our readers who own property will also benefit from the following presentation about the tax advantages available to homeowners

Mannillo v. Gorski: The Case of the Intrusive Neighbor

Property Law Adverse Possession
Property Law

Most aspiring homeowners understand that owning property involves a great deal of responsibility. When you own property, all of the maintenance and liabilities which would otherwise be taken care of by a landlord are absorbed by you. A leaky faucet, faulty drain or unstable foundation is no longer someone else’s obligation. Usually, the responsibilities of homeownership are fairly mundane and do not place an extreme level of stress on homeowners. Every now and then, however, homeownership presents a unique problem which demands an inordinate amount of attention and energy in order to fix. The case of Mannillo v. Gorski (1969) is one example of such a problem.


Gorski (the defendant and appellant) acquired possession of a piece of land in 1946. Mannillo (the plaintiff and respondent) possessed a piece of land which was adjacent to Gorski’s land. Gorski’s son made various improvements to Gorski’s property in the summer of 1946. One of these improvements encroached upon Mannillo’s property. The encroachment was quite small and was not easily visible to the casual observer. By the time Mannillo decided to bring a suit against Gorski in order to remove the encroachment, the statutory period of time required for adverse possession had been satisfied. Gorski argued that he had lawfully gained title to the disputed land because his encroachment satisfied both the element of time as well as the other statutory requirements of adverse possession.

The question before the court was: did Gorski gain title to the disputed section of land by way of adverse possession according to the state (in this case, the state of New Jersey) statute?


In order to gain title by way of adverse possession, the possession must be exclusive, continuous, uninterrupted, visible and notorious, and it must satisfy the statutorily defined period of time.

Importantly, the court in Mannillo v. Gorski determined that there need not be an element of knowing intentional hostility on the part of the adverse possessor. Though an earlier court opinion held that such a mental state was required, the court in Mannillo v. Gorski concluded that such a state was unnecessary.


The court (the Supreme Court of New Jersey) remanded the case and ordered a new trial. Mannillo had succeeded at the trial court level because the trial court included intentional hostility as part of the requirements for adverse possession. And Gorski had actually been under the impression that the disputed section of land was within his territorial boundary, and so clearly the encroachment could not be said to be knowingly hostile. The Supreme Court threw this requirement out.

However, the court found that Gorski’s encroachment did not necessarily satisfy the requirements of adverse possession because the encroachment was so minor as to be practically unnoticeable without focused scrutiny. In cases involving a minor encroachment across adjacent properties, the true owner must have actual knowledge of the encroachment in order for the requirements of adverse possession to be met. The court ordered the new trial to utilize this updated standard.

Clearly, the facts of Mannillo v. Gorski are not likely to be replicated very often; but Mannillo v. Gorski is still something homeowners should be aware of because it illustrates the sort of bizarre difficulties which can occasionally arise during the course of homeownership. Again, if you own property, you probably will not experience what Mr. Mannillo experienced, but it is still important to be aware of even the most unlikely possibilities.

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If you’re a homeowner and you’d like to learn more about the tax benefits which arise through property ownership, view the following webcast presentation by our resident CPA Jessica Chisholm

The Tariff Which Shook History

Tariff Rate Act Morrill Tax
Morrill Tariff

As has been noted previously, substantive changes in tax policy are often closely tied to big changes in the social order. And the tie is not unidirectional, resulting solely from a tendency for tax measures to provoke heated reaction from a population. Sometimes a social change – such as a war – can massively alter the tax policy of a state. In the historical process, tax policy is both an active agent and a reactive agent, both a cause and an effect.

In most cases, it is not too difficult to determine the impact which a change in tax policy has had on society. The assessment of most changes is rather straightforward. The Morrill Tariff of 1861 – named after its sponsor, Vermont politician Justin S. Morrill – stands out among tax law because it defies this trend: although there can be no argument against its general importance, there is considerable controversy as to its specific role in history. Historians are divided as to what role the tariff act played in furthering the secessionist sentiment among Southern states: was the tariff a point of only minor irritation for Southern states? Or was it a matter of major frustration which caused Southern states to view secession as a necessary solution rather than a possibility?

The thing which is certain about the Morrill Tariff is that it raised rates substantially. In the years just preceding the Morrill act, American tariff rates had been unusually low by global standards. Between 1857 and 1860, the U.S. had average rates of approximately 17 percent overall and 21 percent on dutiable items. By 1865, the Morrill Tariff had increased these rates to 38 percent and 48 percent, respectively. Aside from bringing U.S. rates closer to global averages, the Morrill act also provided means to ameliorate the financial woes plaguing the U.S. Treasury.

Support for the Morrill act tended to vary according to political and sectional affiliation. The vast majority of Republicans voted in favor of the act and the clear majority of Democrats opposed it; there was an unmistakable sectional division as well, with every lawmaker from the Southern states except one voting against the act.

Historians who believe that the Morrill Tariff played only a minor role in furthering sectional hostility emphasize the element of time in the adoption of the act. The development of the tariff had begun well before any state had seceded from the union, but not until several states had withdrawn was the tariff act able to succeed in Congress. Historians point to this fact and infer that the tariff had only minimal significance given that a number of states had already decided to secede.

However, on the other side of the issue, historians emphasize that tariff revision had been a heated topic of discussion well before any state declared secession. The South had a clear interest in embracing free trade given the nature of its economy; Southerners also generally felt that they lacked the proper representation in the federal government which was necessary to ensure an equitable outcome. What’s more, the Morrill Tariff was mentioned specifically as a source of displeasure by the conventions of both Georgia and South Carolina; the tariff was even discussed in South Carolina’s secession ordinance.

The precise role of the tariff in promoting secession (and ultimately the War Between the States) will likely be debated for many years to come. Both sides of the matter have facts on which to rest their case; about which there can be no debate, however, is the fact that the tariff must be regarded among the most consequential in U.S. history.

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Armory v. Delamirie & the Evolution of Property Rights

Property Possession Right Law Priority
The Property Right of Possession

The evolution of our law is truly an amazing phenomenon. It is equal parts humbling and awe-inspiring to contemplate that many foundational legal concepts trace their origin to cases which occurred hundreds of years ago. To the casual observer, it may seem as though our law emerged just recently all at once as a finished product, the miraculous outcome of one act of divine intervention; in actuality, our system has come about through an exceedingly slow, gradual process of revision and refinement transpiring over the course of many centuries.

Take, for example, the very basic idea that a person who finds an object establishes some type of claim of ownership to the object. Colloquially, this principle is referred to as the rule of “finders, keepers.” This simple notion was not created by an American jurist, nor was it created within living memory. In point of fact, this idea first acquired legal significance through the famous English case of Armory v. Delamirie which was heard in 1722. Armory formally established the principle that a finder acquires a form of legal title by way of possession.


Armory (plaintiff) was the helper of a chimney sweep. While on the job, he found a jewel composed of gems embedded in a ring. Armory took the jewel to a goldsmith (Delamirie, the defendant) to have it appraised. The goldsmith’s apprentice took the gems from the ring so as to weigh them separately. The apprentice gave Armory an estimation of their value and then returned the ring without the gems. The apprentice made an offer for the jewel but Armory declined. Armory demanded that the gems be returned inside the sockets of the ring in the same condition as when they were initially brought to the goldsmith’s shop. The apprentice did not comply – presumably on the excuse that he “lost” the gems – and subsequently Armory brought a suit against the goldsmith (via respondeat superior) for the return of the jewel.

The issue before the court was whether Armory had a superior title to the jewel despite the fact that he was not the true owner. That is, whether the title he acquired through finding the jewel was sufficient to warrant the return of the jewel from the goldsmith.


In the hierarchy of ownership, the present possessor (or finder) has a superior title against everyone except the true owner.


The court (The Court of King’s Bench) ruled in favor of Armory. Since he found the jewel, Armory’s title was superior to all but the true owner; and since the true owner was unknown this effectively gave Armory true ownership. The court ordered Delamirie to pay Armory for the jewel at the highest possible estimation of the jewel’s value in the absence of any contradictory evidence as to the jewel’s value.

The importance of possession in acquiring property rights was understood prior to the case of Armory v. Delamirie; in fact, the rule of “finders, keepers” has existed in some form since ancient Rome. But it was Armory which caused this old idea to be codified in our common law. The fact that our common law was heavily impacted by a chimney sweep helper’s stroke of good fortune is nothing less than remarkable.

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Thought of the Day: What’s in a Tax?

What’s in a tax?

Divested of all misleading associations and stripped of any false labels, what does a tax truly represent?

Tax History Policy Interest Taxation
Tax Policy

In these last several months, Huddleston Tax Weekly has covered a wide range of topics. We’ve looked at tax measures from eras far removed from our own: we’ve examined the Tea Act which fueled our revolutionary fervor; we looked at the tax acts passed by the Confederacy in its struggle against the North; we even covered the geld, a medieval tax which provides a glimpse into the formation of the English nation. We’ve also touched on topical issues, such as Apple’s EU tax bill and the tax instituted in Vancouver designed to stabilize the real estate market. Our treatment of these many issues has vastly increased our understanding of the role of taxes in history and in our current society.

If there were a single lesson to be drawn from all of the many issues we have covered in these recent months, the lesson would be: tax policy is shaped by the competing interests of distinct groups. Taxes are not developed through a completely rational process in which the interests of every relevant group are considered carefully; in a very real sense, taxes are developed through a competitive process, and the end result usually involves certain groups having a more favored position than others. This is not the most pleasant revelation, but it is one which accurately reflects reality. It may do more to serve the ego of our society to suppose that tax policy is strictly the outcome of reasoned, sensible debate among lawmakers, but this does not mean that such a supposition is any reflection of the truth.

Of course, there are undoubtedly plenty of other lessons to be drawn from the issues we have discussed, and in future installments of Huddleston Tax Weekly we will do our best to cover these lessons. But for now, it is important to understand what taxes represent at a very basic level. Behind all the number crunching, the box checking, the empty bureaucracy, the abstruse terminology and the lofty rhetoric, a tax is a tool utilized to further the interests of a particular group. A tax can be created for any number of reasons: a tax may be used to generate funds for war; a tax may be implemented in order to stabilize a specific market; or a tax may be forcibly imposed by an occupying entity, as was the case with the geld. But no matter what the reason is for its creation, it is clear that any given tax is an extension of a specific interest group.

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United States v. Winthrop & the Test for Ordinary Income

Investment Property Real Estate Land Capital Gain
Investment Property

In our earlier article about the case of Byram v. United States (1983), we introduced the 7 pillars of capital gain treatment and discussed the recurring issue of distinguishing business sales from investment sales. In Byram, the court found the profits of multiple real estate transactions to be capital gains due to the peculiar facts which surrounded the transactions. In this article, we will discuss the specifics of an earlier case – United States v. Winthrop (1969) – in which the court rejected the capital gain classification and ruled that certain transactions were sales made in the ordinary course of business.

It is important that our readers have an understanding which is as clear as possible of what constitutes a capital gain so that they can avoid any unpleasant surprises. The facts of United States v. Winthrop contribute toward this understanding.

The case of United States v. Winthrop will also give readers a sense of the unpredictability in judicial reasoning. Prior to being heard by the Fifth Circuit Court of Appeals, the facts of this case were found to support a capital gain classification at the trial court; the Fifth Circuit actually had to overturn this finding to reach its conclusion. And given that there was no dispute between the trial court and appellate court over any matter of fact in the case, and that there were multiple potentially compelling cases cited by Winthrop, it follows that the outcome of even a strongly backed case cannot be predicted with mathematical certainty.


Over the course of a number of years, Mr. Winthrop (respondent in appellate case) inherited several pieces of real estate. Collectively, these pieces were referred to as “Betton Hills.” Mr. Winthrop inherited his first piece of land in 1932, and he began to develop that same piece a few years later in 1936. Mr. Winthrop inherited additional pieces of land at various other dates (1946, 1948 and 1960).

In 1936, Mr. Winthrop made his first sale by selling a portion of the land he had began developing earlier that same year. Mr. Winthrop continued to develop his land and sell portions of it to interested buyers up until his death in 1963. Hence, his sales operation spanned multiple decades. Though he did not create a business office, he devoted massive amounts of energy to developing the land so as to make it more marketable. What’s more, the income derived from real estate sales constituted the majority of his entire income for many years prior to his death. Mr. Winthrop also began to include “real estate” as his occupation for a number of years in official documents before his death. The question before the court was: should Mr. Winthrop’s activities receive capital gain treatment given the facts which underlay them?


There are a number of common law tests which have been developed to aid the court in its determination of capital gain treatment. Though this is true, the court must also be certain to view each case as an independent matter and provide each case with its own analysis.

In United States v. Winthrop, there was no disagreement made by the Fifth Circuit regarding the fact that the land was held “primarily for sale” by Mr. Winthrop. The only remaining issue was whether the sales executed could be classified as sales made in the ordinary course of business. The Fifth Circuit stated that the ordinary course of business determination depends on whether selling the land was Mr. Winthrop’s primary purpose in holding the land.


The Fifth Circuit overturned the trial court’s finding and determined that the sales made by Mr. Winthrop were made in the ordinary course of business and therefore should be disqualified from capital gain treatment. Mr. Winthrop clearly had a reasonably strong case given that he did not actively and aggressively advertise his properties, he did not maintain a sales office, did not reinvest his profits in other real estate (for the purpose of growing his business) and he initially acquired the real estate through inheritance rather than purchase. There were certainly many facts capable of supporting his position. Ultimately, the fact that Mr. Winthrop only used the properties for the purpose of selling to customers proved to be decisive.

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A Note on the Capital Gains Tax

Capital Gains Tax Rate Money Funds
Capital Gains

As the previous installment of Huddleston Tax Weekly made clear, our tax code draws a distinction between ordinary income and capital gains. In general, ordinary income is income derived throughout the course of running a business or trade; capital gains result from the sale of a “capital asset” (which is defined by the code). It is important for people to understand how their behavior will be classified because these classifications carry particular tax implications. In conjunction with criteria from the tax code, our common law also provides additional guidelines for classifying a given source of income.

The capital gains tax has long been the focus of controversy: many argue that its current low rate disproportionately benefits wealthy citizens and that it should be increased, while others contend that a lower rate actually stimulates more economic growth and that such growth benefits citizens of all socioeconomic levels. The evidence in favor of the latter position is considerable and should strike most objective observers as persuasive. The capital gains tax rate has fluctuated widely over the past several decades, and there is an unmistakable positive correlation between low rates and greater revenues generated from capital gains. This association may appear counterintuitive upon first glance, but a bit more scrutiny makes it very easy to understand: when the tax rate is high, people simply hold on to their assets and avoid paying the tax at a high rate; when the rate is low, people sell more frequently and this results in greater total revenues for the government.

Low rates also appear to influence stock market prices. The tax cuts in the 1980s, the late 1990s, and in 2003 all coincided with significant stock market gains. What’s more, there is also an association between reduced rates and business development as measured by initial public offerings (IPOs), money raised from IPOs and the money committed to venture capital firms. Investors are less willing to commit funds when capital gains tax rates are high; this agrees with common sense given that higher rates will result in smaller returns on investment.

Though lower capital gains tax rates do appear to provide greater benefits to the economy as a whole, there is no denying that such rates disproportionately benefit higher income levels. The clear majority of gains from capital asset sales are made by those with incomes above $200,000. Going forward, it appears that the debate on capital gains tax rates will be framed by this question: can our society accept the positive impact of lower rates even though lower rates tend to benefit wealthy individuals disproportionately?


Moore, Stephen. “Capital Gains Taxes.” David R. Henderson (ed.). Concise Encyclopedia of Economics. Indianapolis: Library of Economics and Liberty.

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Byram v. United States & the 7 Pillars of Capital Gain Treatment

Real Estate Property Transaction Sales Business
Real Estate Transactions

The tax code draws a distinction between ordinary income and income derived from the sale of a capital asset, or “capital gain.” In most instances, this distinction is straightforward and there is little confusion about whether income falls into one category or the other. Every now and then, however, a situation develops in which the classification of income is a difficult matter. There is much at stake in the determination of whether income is either ordinary or derived from the sale of a capital asset: capital gains can be taxed at substantially lower rates than ordinary income.

The case of Byram v. United States (1983) provides one example of the difficulty occasionally involved in distinguishing between a “business” sale – which would trigger ordinary income – and an investment sale. The tax code recognizes a number of general characteristics of business sales and investment sales; sometimes a transaction possesses characteristics of both a business sale and an investment sale, or it lacks enough characteristics of one type of sale to merit a definitive classification.

If you engage in real transactions with any kind of regularity, be sure that you’re aware of these characteristics so you can avoid any unpleasant surprises when tax time rolls around.


John Byram owned multiple pieces of real estate. Between the years 1971 and 1973, Byram sold a total of 22 pieces of real estate for a gross return of $9 million and a net profit of $3.4 million. He sold 7 pieces of real estate in 1973 alone.

Importantly, Byram did not have a business office; he did not advertise; he did not utilize the services of a broker; he did not subdivide the land; he spent only a small amount of time and effort engaging in the transactions; all of the transactions were initiated by the purchasers.


The question of whether a transaction – or set of transactions – can receive “capital gain treatment” (and therefore be subject to the rates applicable to capital gains) depends on the characteristics of the transaction. Courts recognize the 7 “pillars” of capital gain treatment when deciding whether a given transaction should be deemed either an investment sale or business sale.

The 7 Pillars of Capital Gain Treatment can be summed up as follows: (1) purpose of the acquisition of the property and duration of ownership; (2) extent of the efforts to sell the property; (3) number, extent, continuity and magnitude of the sales; (4) time and effort devoted to developing the land and advertising to increase sales; (5) use of a business office; (6) degree of supervision exercised by the owner over any representative selling the property; (7) overall time and energy dedicated to the sales.

The question before the court was: do the transactions made by Byram between 1971-1973 merit capital gain treatment based on the guidelines established through the 7 pillars?


The court (the Court of Appeals for the Fifth Circuit) affirmed the ruling of the lower court in favor of Byram. The transactions engaged in by Byram (and his buyers) possessed enough characteristics of an investment sale to trigger capital gain treatment. The determination of whether capital gain treatment is warranted requires an independent analysis for each individual case; in the Byram case it was clear that the evidence supported the conclusion that the properties were not sold as part of a business enterprise but as investments.

The Byram case is highly useful for people who own multiple pieces of real estate and who are considering selling these pieces in the future. It is important for these owners to be conscious of the facts of Byram so that they can be certain to receive capital gain treatment.

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Readers who enjoyed this essay should check out our presentation of the tax benefits of real estate ownership by CPA Jessica Chisholm

Taxation in the Confederacy

Confederate Tax Act Revenue Taxation
Taxation in the Confederacy

Taxation in the Confederate States of America is a subject not often studied by either professional academics or laypeople. This is not at all surprising: there is a natural tendency to avoid giving deep attention to things considered deplorable, and since the legacy of the Confederacy is construed as wretched by so many people, it follows that a great many are ignorant of the details of Confederate society. Today, we will go against natural tendency and take a look at the tax acts passed by the rebel government in its attempt to raise revenue for the war.

Revenue derived from taxation made up only a very small part of the war fund for the South. In total, taxes constituted roughly 8.2 percent of the war account; this is less than half of the percentage contributed by taxes for the Union. Compared to the North, the Confederacy was slow to impose a “direct” tax on its population in large part because of its strong commitment to state’s rights and opposition to centralized government. As we will explore in detail below, the Confederate Congress passed two tax measures during the course of the war; neither of these measures generated sufficient income, and by the end of the war it was evident that financial trouble had played a substantial role in the demise of the South.

War Tax of 1861

At the beginning of the war, the Confederate government relied on tax revenue derived from international trade (i.e. tariffs and taxes on exports) and financial contributions from private citizens. These sources of funding started off well, but by the close of 1861 both had dried up almost entirely. The collapse of these sources prompted the Confederacy to impose a “War Tax” which was passed in August of 1861. The War Tax consisted of taxes on a number of items identified by the Treasury and a tax on real property greater than $500 in value.

In its first year (1862) of operation, the War Tax contributed a measly 5 percent of total war revenue. Not only was the tax relatively gentle in its basic terms, collection proved to be much more difficult than Confederate lawmakers had anticipated.

Agricultural Produce Tax of 1863

In response to the lackluster performance of the tax act of 1861, the Confederate Congress passed the Tithe Act – otherwise known as the Tax-in-Kind – in April of 1863. On top of the taxes imposed by the War Tax, the Tithe Act placed a tax of 10 percent on agricultural produce. The Tithe Act was referred to as the “tax-in-kind” because it was not paid in currency but with physical goods; under this act, 10 percent of the actual produce of plantation owners was handed over directly to the government, not 10 percent of their profits. Though it was plagued by implementation difficulties of its own, the produce tax was relatively successful and contributed a substantial portion of overall tax revenue in the remaining years of the conflict.

Controversy surrounded the tax-in-kind because it was interpreted as a direct tax by the Confederate Congress. Though they were in rebellion against the Union, the lawmakers of the Confederate Congress still adhered to the constitutional principle of apportionment for direct taxes and so many felt the Tithe Act unacceptable on this principle. The financial condition of the South ultimately tipped the scales and the act was passed out of sheer necessity.


Richard Burdekin and Farrokh Langdana, “War Finance in the Southern Confederacy, 1861-1865,” Explorations in Economic History, Vol. 30, No. 3, July 1993.

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A Quick Look at the Tea Act of 1773

British Tea Act Parliament America Company
The Tea Act of 1773

It has been noted before on Huddleston Tax Weekly that there is a strong tendency in contemporary society to associate taxes with things which are mundane, dull and boring. We’ve also noted that these associations are based on the conditions of our society at the present moment and would make little sense if based on conditions from previous eras. Throughout the bulk of recorded history, taxes have been closely tied to a host of exciting and oftentimes frightening things. With few exceptions, substantive changes in tax policy have accompanied sweeping changes to the existing social order, and the Tea Act of 1773 does not stray from this general rule.

As we will see, the significance of the Tea Act of 1773 stems mostly from the way it was received by the American colonists of the British Empire. The purpose of the act was not simply to generate revenue, but to provide confirmation of the power of the British Parliament to directly tax the American colonies. The act not only failed to achieve its intended goals but also sparked a reaction which ultimately altered the entire course of world history.

Historical Setting

The passing of the Tea Act was surrounded by a number of important political and business phenomena. One of the most pressing concerns of the British Parliament during this (pre-revolutionary) era was to have its power to tax the American colonies fully accepted by American colonists. This concern was among the driving forces behind the so-called Townshend Acts. The Townshend Acts consisted of a series of measures which dealt with a variety of issues relating to the administration of the American colonies. The first of these acts – the Revenue Act of 1767, also referred to simply as the Townshend Act – imposed a tax on tea (and several other items) imported to the colonies. The act forbade the colonists to purchase tea from any supplier other than Great Britain.

The Revenue Act was met with serious opposition from the American colonists who swiftly condemned the measure as a piece of blatant tyranny. Thenceforth the aim to legitimize the taxing power of the British Parliament over its colonies intensified.

Before the Tea Act, the British East India Company had been directed to sell its tea exclusively in London. Tea from the company which did make it to North America did so only through outside merchants who specialized in international sales. By the time the tea reached the market for American consumers, markups and the tax imposed by the Revenue Act made the tea an unattractive buy. As a consequence of these policies, an underground market developed in which foreign (Dutch) tea was smuggled into the colonies and sold at much lower prices. In addition to legitimizing the Parliament’s taxing power, the Tea Act was also passed with the aim of improving the financial condition of the East India Company and shutting down the flow of smuggled foreign tea.

The act contained these terms: the East India Company had the ability to ship its tea directly to North America; the company was no longer bound to sell its tea exclusively in London; duties on tea charged in Britain which were shipped out for international sale would either be refunded when exiting the country or not imposed; and finally, those receiving the company’s tea were required to pay a deposit up front following delivery.

Colonial Reaction

The British lawmakers in the Parliament had reason to believe that the Tea Act would produce favorable results: the tea sold by the East India Company was of higher quality than Dutch tea, and since its price had been lowered, the lawmakers could sensibly infer that the smuggled Dutch tea would lose its competitive advantage. Unfortunately for the British lawmakers, the act would be opposed not only by those colonists who continued to reject Parliament’s ability to lay the tax of the Revenue Act, but also by colonial merchants and underground businessmen who had a financial interest in preventing the ascendancy of the East India Company.

After the act was passed, the East India Company sent a number of ships to America in the hope of unloading its tea on the market; none of these ships was to unload its cargo successfully. Most famously, the ships which arrived at the ports in Boston were raided by irate colonists who tossed the company’s tea into the harbor. This incident came to be known as the “Boston Tea Party,” though it was referred to as the “Destruction of the Tea” in its own time. The colonial stance on the Parliament’s ability to impose taxes was clear, and the stage was set for the massive insurrection which was to eventually give birth to the sovereignty of the States.

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