Why does Thomas Paine believe that being labeled as rebels would have a negative effect on the American cause?

It associates with being wrong or anti-government instead of revolutionary--Thomas Paine wanted the movement to be painted as patriots or people fighting for the rights of individuals.

The word rebel suggests a militant effort to fight against the government. Thomas Paine was arguing they were doing more. They were looking to create a new government and to revolutionize the colonies as they were known. They were fighting to something new not against the old.