@tintin,
Outrage means anger (and it is a strong word).
Let's break down the points.
1) The revolutionaries used paper to print propaganda.
2) They put a tax on this paper.
3) Outrage about this tax is spreading through the colonies (i.e. people in the colonies got very angry).
4) The officials fear violence.
I agree that it could use punctuation-- maybe one more comma would do the trick. Or, is this a place for a semicolon (an real grammar experts here)?
Outrage over the taxation of paper; the key raw material used by early revolutionaries to disseminate propagandist documents, is spreading throughout the colonies