In a manually created menu, when a taxonomy term is a parent with children, the children never display. Bug? I manually created a menu where each parent term is a taxonomy. so:

Menu name:cars

Path: cars

Note that 'cars' is a path auto generated url for taxonomy/term/3.  I thought you could only put nodes here, but this saves instead of giving the usual error when the path is not available.

Each one of these parent items has 1 level of children. Or, should at least.

In the Structure > Menu view, you can easily see the menu structure with parent and children.

however, when this is rendered as a menu block, only the parents are displayed. Is this because the Parent is a taxonomy term and not a node?

One of the reasons I think it may be a bug is that if you look at the source code the html shows 'collapsed' as an li class, indicating that it knows it needs to have children here. The second reason I think this is a bug is that if I change this to node/(number) then everything works fine.
Anyone know a solution to get this working?
Have you tried editing the parent menu item and enabling the 'Expanded' checkbox? This module may also come in handy: http://drupal.org/project/menu_expanded

Keep in mind that in many themes, the stock menu for primary links / secondary links is not a multi-level menu and so even if expanded renders the child items in HTML, they may not render properly in the actual menu. If this is the case, you may wish to look at implementing a menu block with one of the menu modules such as: http://drupal.org/project/superfish