[Congressional Bills 104th Congress]
[From the U.S. Government Publishing Office]
[S. 1038 Introduced in Senate (IS)]







104th CONGRESS
  1st Session
                                S. 1038

 To amend the Internal Revenue Code of 1986 to impose a 15 percent tax 
 only on individual taxable earned income and business taxable income, 
 to repeal the estate and gift taxes, to abolish the Internal Revenue 
                    Service, and for other purposes.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                July 14 (legislative day, July 10), 1995

   Mr. Helms introduced the following bill; which was read twice and 
                  referred to the Committee on Finance

_______________________________________________________________________

                                 A BILL


 
 To amend the Internal Revenue Code of 1986 to impose a 15 percent tax 
 only on individual taxable earned income and business taxable income, 
 to repeal the estate and gift taxes, to abolish the Internal Revenue 
                    Service, and for other purposes.
    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Flat Tax Act of 1995''.

                           TITLE I--FLAT TAX

SEC. 101. 15 PERCENT INCOME TAX RATE FOR INDIVIDUALS.

    Section 1 of the Internal Revenue Code of 1986 (relating to tax 
imposed on individuals) is amended to read as follows:

``SECTION 1. TAX IMPOSED.

    ``(a) In General.--There is hereby imposed on the income of every 
individual a tax equal to 15 percent of the excess of the earned income 
of such individual for the taxable year over the standard exemption 
amount for such year.
    ``(b) Definitions.--For purposes of this section--
            ``(1) Standard exemption amount.--
                    ``(A) In general.--The term `standard exemption 
                amount' means the sum of--
                            ``(i) the basic standard exemption, plus
                            ``(ii) the additional standard exemption.
                    ``(B) Basic standard exemption.--For purposes of 
                subparagraph (A), the basic standard exemption is--
                            ``(i) $20,000 in the case of--
                                    ``(I) a joint return, and
                                    ``(II) a surviving spouse (as 
                                defined in section 2(a)),
                            ``(ii) $15,000 in the case of a head of 
                        household (as defined in section 2(b)), and
                            ``(iii) $10,000 in the case of an 
                        individual--
                                    ``(I) who is not married and who is 
                                not a surviving spouse or head of 
                                household, or
                                    ``(II) who is a married individual 
                                filing a separate return.
                    ``(C) Additional standard exemption.--For purposes 
                of subparagraph (A), the additional standard exemption 
                is $5,000 for each dependent (as defined in section 
                152)--
                            ``(i) whose earned income for the calendar 
                        year in which the taxable year of the taxpayer 
                        begins is less than the basic standard 
                        exemption specified in subparagraph (B)(iii), 
                        or
                            ``(ii) who is a child of the taxpayer and 
                        who--
                                    ``(I) has not attained the age of 
                                19 at the close of the calendar year in 
                                which the taxable year of the taxpayer 
                                begins, or
                                    ``(II) is a student who has not 
                                attained the age of 24 at the close of 
                                such calendar year.
                    ``(D) Inflation adjustment.--
                            ``(i) In general.--In the case of any 
                        taxable year beginning in a calendar year after 
                        1997, each dollar amount contained in 
                        subparagraphs (B) and (C) shall be increased by 
                        an amount equal to--
                                    ``(I) such dollar amount, 
                                multiplied by
                                    ``(II) the cost-of-living 
                                adjustment for the calendar year in 
                                which the taxable year begins.
                            ``(ii) Cost-of-living adjustment.--For 
                        purposes of this subparagraph--
                                    ``(I) In general.--The cost-of-
                                living adjustment for any calendar year 
                                is the percentage (if any) by which the 
                                CPI for October of the preceding 
                                calendar year, exceeds the CPI for 
                                October of 1996.
                                    ``(II) CPI.--The term `CPI' means 
                                the last Consumer Price Index for all-
                                urban consumers published by the 
                                Department of Labor.
                            ``(iii) Rounding.--If the increase 
                        determined under this subparagraph is not a 
                        multiple of $10, such increase shall be rounded 
                        to the nearest multiple of $10.
            ``(2) Earned income.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), the term `earned income' means--
                            ``(i) wages, salaries, and other employee 
                        compensation,
                            ``(ii) the amount of the taxpayer's net 
                        earnings from self-employment for the taxable 
                        year, and
                            ``(iii) the amount of dividends which are 
                        from a personal service corporation or which 
                        are otherwise directly or indirectly 
                        compensation for services.
                    ``(B) Exceptions.--The term `earned income' does 
                not include--
                            ``(i) any amount received as a pension or 
                        annuity, or
                            ``(ii) any tip unless the amount of the tip 
                        is not within the discretion of the service-
                        recipient.''

SEC. 102. TRANSITION RULE FOR HOME MORTGAGE INTEREST DEDUCTION.

    Section 1 of the Internal Revenue Code of 1986, as amended by 
section 2 of this Act, is amended--
            (1) by striking subsection (a) and inserting the following 
        new subsection:
    ``(a) In General.--There is hereby imposed on the income of every 
individual a tax equal to 15 percent of the excess of--
            ``(1) the earned income of the taxpayer for the taxable 
        year, over
            ``(2) the standard exemption amount and the excess 
        qualified residence interest amount for such taxpayer for such 
        year.'', and
            (2) in subsection (b), by redesignating paragraph (2) as 
        paragraph (3) and by inserting after paragraph (1) the 
        following new paragraph:
            ``(2) Excess qualified residence interest amount.--The 
        excess qualified residence amount for any taxable year is equal 
        to the excess (if any) of--
                    ``(A) the amount which would have been allowable as 
                a deduction to the taxpayer for such year under section 
                163(h)(3), as in effect on the day before the effective 
                date of the Flat Tax Act of 1995 (determined without 
                regard to section 68 (as so in effect)), with respect 
                to any indebtedness incurred on or before such day, 
                over
                    ``(B) one-half of the basic standard exemption for 
                an individual for such year.''

SEC. 103. 15 PERCENT INCOME TAX RATE FOR BUSINESS ACTIVITIES.

    Section 11 of the Internal Revenue Code of 1986 (relating to tax 
imposed on corporations) is amended to read as follows:
``SEC. 11. TAX IMPOSED.

    ``(a) Tax Imposed.--There is hereby imposed on every person engaged 
in a business activity a tax equal to 15 percent of the business 
taxable income of such person.
    ``(b) Liability for Tax.--The tax imposed by this section shall be 
paid by the person engaged in the business activity, whether such 
person is an individual, partnership, corporation, or otherwise.
    ``(c) Business Taxable Income.--
            ``(1) In general.--For purposes of this section, the term 
        `business taxable income' means gross active income reduced by 
        the deductions specified in subsection (d).
            ``(2) Gross active income.--For purposes of paragraph (1), 
        the term `gross active income' means gross income other than 
        investment income.
    ``(d) Deductions.--
            ``(1) In general.--The deductions specified in this 
        subsection are--
                    ``(A) the cost of business inputs for the business 
                activity,
                    ``(B) the compensation (including contributions to 
                qualified retirement plans but not including other 
                fringe benefits) paid for employees performing services 
                in such activity, and
                    ``(C) the cost of tangible personal and real 
                property used in such activity.
            ``(2) Business inputs.--For purposes of subparagraph (A), 
        the term `cost of business inputs' means--
                    ``(A) the actual amount paid for goods, services, 
                and materials, whether or not resold during the taxable 
                year,
                    ``(B) the fair market value of business inputs 
                brought into the United States, and
                    ``(C) the actual cost, if reasonable, of travel and 
                entertainment expenses for business purposes.
        Such term shall not include purchases of goods and services 
        provided to employees or owners.
    ``(e) Carryover of Excess Deductions.--If the aggregate deductions 
for any taxable year exceed the gross active income for such taxable 
year, the amount of the deductions specified in subsection (d) for the 
succeeding taxable year (determined without regard to this subsection) 
shall be increased by the sum of--
            ``(1) such excess, plus
            ``(2) the product of such excess and the 3-month Treasury 
        rate for the last month of such taxable year.''

SEC. 104. REPEAL OF SPECIAL DEDUCTIONS, CREDITS, AND EXCLUSIONS FROM 
              INCOME FOR CORPORATIONS AND INDIVIDUALS.

    Chapter 1 of the Internal Revenue Code of 1986 is amended by 
striking out all specific exclusions from gross income, all deductions, 
and all credits against income tax to the extent related to the 
computation of corporate and individual income tax liability.

SEC. 105. REPEAL OF ESTATE AND GIFT TAXES.

    Subtitle B of the Internal Revenue Code of 1986 (relating to 
estate, gift, and generation-skipping taxes) is hereby repealed.

SEC. 106. EFFECTIVE DATES.

    (a) In General.--Except as provided in subsection (b), the 
amendments made by this title shall apply to taxable years beginning 
after December 31, 1996.
    (b) Repeal of Estate and Gift Taxes.--The repeal made by section 
105 shall apply to estates of decedents dying, and transfers made, 
after December 31, 1996.
    (c) Technical and Conforming Changes.--The Secretary of the 
Treasury or the Secretary's delegate shall, as soon as practicable but 
in any event not later than 90 days after the date of the enactment of 
this Act, submit to the Committee on Ways and Means of the House of 
Representatives and the Committee on Finance of the Senate a draft of 
any technical and conforming changes in the Internal Revenue Code of 
1986 which are necessary to reflect throughout such Code the changes in 
the substantive provisions of law made by this Act.

                TITLE II--REDUCTIONS IN FEDERAL SPENDING

SEC. 201. REDUCTIONS IN FEDERAL SPENDING.

    (a) Adjustment of Discretionary Caps.--
            (1) Discretionary spending limits and direct spending 
        balances.--Not later than 5 days after the date of enactment of 
        this Act, the President shall reduce the discretionary spending 
        limits under section 601 of the Congressional Budget Act of 
        1974 for each of the fiscal years 1996, 1997, and 1998 to 
        reflect a reduction of 15 percent in budget authority and 
        budget outlays for each fiscal year.
            (2) Adjustment of committee allocations.--Not later than 5 
        days after the date of enactment of this Act, the chairs of the 
        Committees on the Budget of the Senate and the House of 
        Representatives shall revise levels under section 311(a) of the 
        Congressional Budget Act of 1974 and adjust the committee 
        allocations under section 602(a) of the Congressional Budget 
        Act of 1974 to reflect the reductions required by paragraph 
        (1).
    (b) Foreign Aid.--Notwithstanding subsection (a), the amount of 
budget authority provided under budget function 150 relating to United 
States assistance (as defined in section 481(e)(4) of the Foreign 
Assistance Act of 1961 (22 U.S.C. 2291(e)(4)) for payments not required 
by law shall not exceed--
            (1) for fiscal year 1996, 60 percent of the amount provided 
        for fiscal year 1995;
            (2) for fiscal year 1997, 50 percent of the amount provided 
        for fiscal year 1995; and
            (3) for fiscal year 1998, 40 percent of the amount provided 
        for fiscal year 1995.
    (c) Freeze on Department of Defense.--Notwithstanding subsection 
(a), the amount of budget authority provided under budget function 050 
(national defense) for payments not required by law for each of the 
fiscal years 1996, 1997, and 1998 shall not exceed the amount provided 
for fiscal year 1995.
    (d) No Reduction in the Administrative Expenses of the Social 
Security Administration and Medicare.--Notwithstanding subsection (a), 
the amount of budget authority provided for the administrative expenses 
of the Social Security Administration and medicare for payments not 
required by law for each of the fiscal years 1996, 1997, and 1998 shall 
not be reduced by reason of subsection (a).

SEC. 202. REDUCTION IN DIRECT SPENDING.

    (a) Reduction.--
            (1) In general.--Except as provided in paragraph (2), the 
        level of direct spending for fiscal years 1996, 1997, and 1998 
        shall not exceed 85 percent of the level for fiscal year 1995.
            (2) Exception.--Paragraph (1) shall not apply to--
                    (A) social security;
                    (B) medicare; and
                    (C) veterans' programs.
    (b) Implementing Legislation.--
            (1) Committee action.--Not later than September 1, 1995, 
        the committees of the House of Representatives and Senate shall 
        report legislation reducing the direct spending programs within 
        their jurisdiction as required by subsection (a).
            (2) Enactment.--Not later than September 30, 1995, the 
        Senate and the House of Representatives shall enact legislation 
        complying with paragraph (1).

SEC. 203. ELIMINATION OF THE INTERNAL REVENUE SERVICE.

    (a) Elimination of the Internal Revenue Service.--Effective January 
1, 1997, the Internal Revenue Service is abolished.
    (b) Transfer of Functions.--
            (1) Function defined.--For purposes of this subsection, the 
        term ``function'' means any duty, obligation, power, authority, 
        responsibility, right, privilege, activity, or program.
            (2) Transfer to treasury.--The functions of the Internal 
        Revenue Service are transferred to the Department of the 
        Treasury.
            (3) Transfer to secretary.--The functions of the 
        Commissioner of Internal Revenue shall be performed by the 
        Secretary of the Treasury or the designee of the Secretary.
    (b) Amendment to the Internal Revenue Code of 1986.--Section 
7802(a) of the Internal Revenue Code of 1986 is repealed.
    (c) References.--Reference in any other Federal law, Executive 
order, rule, regulation, or delegation of authority, or any document of 
or relating to--
            (1) the Commissioner of Internal Revenue with regard to 
        functions transferred under this subsection, shall be deemed to 
        refer to the Secretary of the Treasury; and
            (2) the Internal Revenue Service with regard to functions 
        transferred under this subsection, shall be deemed to refer to 
        the Department of the Treasury.
    (d) Additional Conforming Amendments.--
            (1) After consultation with the appropriate committees of 
        the Congress, the Secretary of the Treasury shall prepare and 
        submit to the Congress recommended legislation containing 
        technical and conforming amendments to reflect the changes made 
        by this subsection.
            (2) Not later than 6 months after the effective date of 
        this Act, the Secretary of the Treasury shall submit the 
        recommended legislation referred to under paragraph (1).
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