[Congressional Bills 109th Congress]
[From the U.S. Government Publishing Office]
[S. 1099 Introduced in Senate (IS)]







109th CONGRESS
  1st Session
                                S. 1099

To repeal the current Internal Revenue Code and replace it with a flat 
tax, thereby guaranteeing economic growth and greater fairness for all 
                               Americans.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                              May 23, 2005

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

_______________________________________________________________________

                                 A BILL


 
To repeal the current Internal Revenue Code and replace it with a flat 
tax, thereby guaranteeing economic growth and greater fairness for all 
                               Americans.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE; TABLE OF CONTENTS.

    (a) Short Title.--This Act may be cited as the ``Tax Simplification 
Act of 2005''.
    (b) Table of Contents.--

Sec. 1. Short title; table of contents.
               TITLE I--TAX REDUCTION AND SIMPLIFICATION

Sec. 101. Individual income tax.
Sec. 102. Tax on business activities.
Sec. 103. Simplification of rules relating to qualified retirement 
                            plans.
Sec. 104. Repeal of alternative minimum tax.
Sec. 105. Repeal of credits.
Sec. 106. Repeal of estate and gift taxes and obsolete income tax 
                            provisions.
Sec. 107. Effective date.
            TITLE II--SUPERMAJORITY REQUIRED FOR TAX CHANGES

Sec. 201. Supermajority required.

               TITLE I--TAX REDUCTION AND SIMPLIFICATION

SEC. 101. INDIVIDUAL INCOME TAX.

    (a) In General.--Section 1 of the Internal Revenue Code of 1986 is 
amended to read as follows:

``SECTION 1. TAX IMPOSED.

    ``There is hereby imposed on the taxable income of every individual 
a tax equal to 19 percent (17 percent in the case of taxable years 
beginning after December 31, 2007) of the taxable income of such 
individual for such taxable year.''.
    (b) Taxable Income.--Section 63 of such Code is amended to read as 
follows:

``SEC. 63. TAXABLE INCOME.

    ``(a) In General.--For purposes of this subtitle, the term `taxable 
income' means the excess of--
            ``(1) the sum of--
                    ``(A) wages (as defined in section 3121(a) without 
                regard to paragraph (1) thereof) which are paid in cash 
                and which are received during the taxable year for 
                services performed in the United States,
                    ``(B) retirement distributions which are includible 
                in gross income for such taxable year, plus
                    ``(C) amounts received under any law of the United 
                States or of any State which is in the nature of 
                unemployment compensation, over
            ``(2) the standard deduction.
    ``(b) Standard Deduction.--
            ``(1) In general.--For purposes of this subtitle, the term 
        `standard deduction' means the sum of--
                    ``(A) the basic standard deduction, plus
                    ``(B) the additional standard deduction.
            ``(2) Basic standard deduction.--For purposes of paragraph 
        (1), the basic standard deduction is--
                    ``(A) $25,580 in the case of--
                            ``(i) a joint return, or
                            ``(ii) a surviving spouse (as defined in 
                        section 2(a)),
                    ``(B) $16,330 in the case of a head of household 
                (as defined in section 2(b)), and
                    ``(C) $12,790 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.
            ``(3) Additional standard deduction.--For purposes of 
        paragraph (1), the additional standard deduction is $5,510 for 
        each dependent (as defined in section 152) who is described in 
        section 151(c) for the taxable year and who is not required to 
        file a return for such taxable year.
    ``(c) Retirement Distributions.--For purposes of subsection (a), 
the term `retirement distribution' means any distribution from--
            ``(1) a plan described in section 401(a) which includes a 
        trust exempt from tax under section 501(a),
            ``(2) an annuity plan described in section 403(a),
            ``(3) an annuity contract described in section 403(b),
            ``(4) an individual retirement account described in section 
        408(a),
            ``(5) an individual retirement annuity described in section 
        408(b),
            ``(6) an eligible deferred compensation plan (as defined in 
        section 457),
            ``(7) a governmental plan (as defined in section 414(d)), 
        or
            ``(8) a trust described in section 501(c)(18).
Such term includes any plan, contract, account, annuity, or trust 
which, at any time, has been determined by the Secretary to be such a 
plan, contract, account, annuity, or trust.
    ``(d) Income of Certain Children.--For purposes of this subtitle--
            ``(1) an individual's taxable income shall include the 
        taxable income of each dependent child of such individual who 
        has not attained age 14 as of the close of such taxable year, 
        and
            ``(2) such dependent child shall have no liability for tax 
        imposed by section 1 with respect to such income and shall not 
        be required to file a return for such taxable year.
    ``(e) Inflation Adjustment.--
            ``(1) In general.--In the case of any taxable year 
        beginning in a calendar year after 2006, each dollar amount 
        contained in subsection (b) shall be increased by an amount 
        determined by the Secretary to be equal to--
                    ``(A) such dollar amount, multiplied by
                    ``(B) the cost-of-living adjustment for such 
                calendar year.
            ``(2) Cost-of-living adjustment.--For purposes of paragraph 
        (1), the cost-of-living adjustment for any calendar year is the 
        percentage (if any) by which--
                    ``(A) the CPI for the preceding calendar year, 
                exceeds
                    ``(B) the CPI for the calendar year 2005.
            ``(3) CPI for any calendar year.--For purposes of paragraph 
        (2), the CPI for any calendar year is the average of the 
        Consumer Price Index as of the close of the 12-month period 
        ending on August 31 of such calendar year.
            ``(4) Consumer price index.--For purposes of paragraph (3), 
        the term `Consumer Price Index' means the last Consumer Price 
        Index for all-urban consumers published by the Department of 
        Labor. For purposes of the preceding sentence, the revision of 
        the Consumer Price Index which is most consistent with the 
        Consumer Price Index for calendar year 1986 shall be used.
            ``(5) Rounding.--If any increase determined under paragraph 
        (1) is not a multiple of $10, such increase shall be rounded to 
        the next highest multiple of $10.
    ``(f) Marital Status.--For purposes of this section, marital status 
shall be determined under section 7703.''.

SEC. 102. TAX ON BUSINESS ACTIVITIES.

    (a) In General.--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 ON BUSINESS ACTIVITIES.

    ``(a) Tax Imposed.--There is hereby imposed on every person engaged 
in a business activity a tax equal to 19 percent (17 percent in the 
case of taxable years beginning after December 31, 2007) 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.--For purposes of this section--
            ``(1) In general.--The term `business taxable income' means 
        gross active income reduced by the deductions specified in 
        subsection (d).
            ``(2) Gross active income.--
                    ``(A) In general.--For purposes of paragraph (1), 
                the term `gross active income' means gross receipts 
                from--
                            ``(i) the sale or exchange of property or 
                        services in the United States by any person in 
                        connection with a business activity, and
                            ``(ii) the export of property or services 
                        from the United States in connection with a 
                        business activity.
                    ``(B) Exchanges.--For purposes of this section, the 
                amount treated as gross receipts from the exchange of 
                property or services is the fair market value of the 
                property or services received, plus any money received.
                    ``(C) Coordination with special rules for financial 
                services, etc.--Except as provided in subsection (e)--
                            ``(i) the term `property' does not include 
                        money or any financial instrument, and
                            ``(ii) the term `services' does not include 
                        financial services.
            ``(3) Exemption from tax for activities of governmental 
        entities and tax-exempt organizations.--For purposes of this 
        section, the term `business activity' does not include any 
        activity of a governmental entity or of any other organization 
        which is exempt from tax under this chapter.
    ``(d) Deductions.--
            ``(1) In general.--The deductions specified in this 
        subsection are--
                    ``(A) the cost of business inputs for the business 
                activity,
                    ``(B) wages (as defined in section 3121(a) without 
                regard to paragraph (1) thereof) which are paid in cash 
                for services performed in the United States as an 
                employee, and
                    ``(C) retirement contributions to or under any plan 
                or arrangement which makes retirement distributions (as 
                defined in section 63(c)) for the benefit of such 
                employees to the extent such contributions are allowed 
                as a deduction under section 404.
            ``(2) Business inputs.--
                    ``(A) In general.--For purposes of paragraph (1), 
                the term `cost of business inputs' means--
                            ``(i) the amount paid for property sold or 
                        used in connection with a business activity,
                            ``(ii) the amount paid for services (other 
                        than for the services of employees, including 
                        fringe benefits paid by reason of such 
                        services) in connection with a business 
                        activity, and
                            ``(iii) any excise tax, sales tax, customs 
                        duty, or other separately stated levy imposed 
                        by a Federal, State, or local government on the 
                        purchase of property or services which are for 
                        use in connection with a business activity.
                Such term shall not include any tax imposed by chapter 
                2 or 21.
                    ``(B) Exceptions.--Such term shall not include--
                            ``(i) items described in subparagraphs (B) 
                        and (C) of paragraph (1), and
                            ``(ii) items for personal use not in 
                        connection with any business activity.
                    ``(C) Exchanges.--For purposes of this section, the 
                amount treated as paid in connection with the exchange 
                of property or services is the fair market value of the 
                property or services exchanged, plus any money paid.
    ``(e) Special Rules for Financial Intermediation Service 
Activities.--In the case of the business activity of providing 
financial intermediation services, the taxable income from such 
activity shall be equal to the value of the intermediation services 
provided in such activity.
    ``(f) Exception for Services Performed as Employee.--For purposes 
of this section, the term `business activity' does not include the 
performance of services by an employee for the employee's employer.
    ``(g) Carryover of Credit-Equivalent of Excess Deductions.--
            ``(1) In general.--If the aggregate deductions for any 
        taxable year exceed the gross active income for such taxable 
        year, the credit-equivalent of such excess shall be allowed as 
        a credit against the tax imposed by this section for the 
        following taxable year.
            ``(2) Credit-equivalent of excess deductions.--For purposes 
        of paragraph (1), the credit-equivalent of the excess described 
        in paragraph (1) for any taxable year is an amount equal to--
                    ``(A) the sum of--
                            ``(i) such excess, plus
                            ``(ii) the product of such excess and the 
                        3-month Treasury rate for the last month of 
                        such taxable year, multiplied by
                    ``(B) the rate of the tax imposed by subsection (a) 
                for such taxable year.
            ``(3) Carryover of unused credit.--If the credit allowable 
        for any taxable year by reason of this subsection exceeds the 
        tax imposed by this section for such year, then (in lieu of 
        treating such excess as an overpayment) the sum of--
                    ``(A) such excess, plus
                    ``(B) the product of such excess and the 3-month 
                Treasury rate for the last month of such taxable year, 
                shall be allowed as a credit against the tax imposed by 
                this section for the following taxable year.
            ``(4) 3-month treasury rate.--For purposes of this 
        subsection, the 3-month Treasury rate is the rate determined by 
        the Secretary based on the average market yield (during any 1-
        month period selected by the Secretary and ending in the 
        calendar month in which the determination is made) on 
        outstanding marketable obligations of the United States with 
        remaining periods to maturity of 3 months or less.''.
    (b) Tax on Tax-Exempt Entities Providing Noncash Compensation to 
Employees.--Section 4977 of such Code is amended to read as follows:

``SEC. 4977. TAX ON NONCASH COMPENSATION PROVIDED TO EMPLOYEES NOT 
              ENGAGED IN BUSINESS ACTIVITY.

    ``(a) Imposition of Tax.--There is hereby imposed a tax equal to 19 
percent (17 percent in the case of calendar years beginning after 
December 31, 2007) of the value of excludable compensation provided 
during the calendar year by an employer for the benefit of employees to 
whom this section applies.
    ``(b) Liability for Tax.--The tax imposed by this section shall be 
paid by the employer.
    ``(c) Excludable Compensation.--For purposes of subsection (a), the 
term `excludable compensation' means any remuneration for services 
performed as an employee other than--
            ``(1) wages (as defined in section 3121(a) without regard 
        to paragraph (1) thereof) which are paid in cash,
            ``(2) remuneration for services performed outside the 
        United States, and
            ``(3) retirement contributions to or under any plan or 
        arrangement which makes retirement distributions (as defined in 
        section 63(c)).
    ``(d) Employees to Whom Section Applies.--This section shall apply 
to an employee who is employed in any activity by--
            ``(1) any organization which is exempt from taxation under 
        this chapter, or
            ``(2) any agency or instrumentality of the United States, 
        any State or political subdivision of a State, or the District 
        of Columbia.''.

SEC. 103. SIMPLIFICATION OF RULES RELATING TO QUALIFIED RETIREMENT 
              PLANS.

    (a) In General.--The following provisions of the Internal Revenue 
Code of 1986 are hereby repealed:
            (1) Nondiscrimination rules.--
                    (A) Paragraphs (4) and (5) of section 401(a) 
                (relating to nondiscrimination requirements).
                    (B) Sections 401(a)(10)(B) and 416 (relating to top 
                heavy plans).
                    (C) Section 401(a)(17) (relating to compensation 
                limit).
                    (D) Sections 401(a)(26) and 410(b) (relating to 
                minimum participation and coverage requirements).
                    (E) Paragraphs (3), (8), (11), and (12) of sections 
                401(k), and section 4979, (relating to actual deferral 
                percentage).
                    (F) Section 401(l) (relating to permitted disparity 
                in plan contributions or benefits).
                    (G) Section 401(m) (relating to nondiscrimination 
                test for matching contributions and employee 
                contributions).
                    (H) Paragraphs (1)(D) and (12) of section 403(b) 
                (relating to nondiscrimination requirements).
                    (I) Paragraph (3) of section 408(k) and paragraph 
                (6) (other than subparagraph (A)(i)) of such section 
                (relating to simplified employee pensions).
            (2) Contribution limits.--
                    (A) Sections 401(a)(16), 403(b) (2) and (3), and 
                415 (relating to limitations on benefits and 
                contributions under qualified plans).
                    (B) Sections 401(a)(30) and 402(g) (relating to 
                limitation on exclusion for elective deferrals).
                    (C) Paragraphs (3) and (7) of section 404(a) 
                (relating to percentage of compensation limits).
                    (D) Section 404(l) (relating to limit on includible 
                compensation).
            (3) Restrictions on distributions.--
                    (A) Section 72(t) (relating to 10-percent 
                additional tax on early distributions from qualified 
                retirement plans).
                    (B) Sections 401(a)(9), 403(b)(10), and 4974 
                (relating to minimum distribution rules).
                    (C) Section 402(e)(4) (relating to net unrealized 
                appreciation).
            (4) Special requirements for plan benefiting self-employed 
        individuals.--Subsections (a)(10)(A) and (d) of section 401.
            (5) Prohibition of tax-exempt organizations and governments 
        from having qualified cash or deferred arrangements.--Section 
        401(k)(4)(B).
    (b) Employer Reversions of Excess Pension Assets Permitted Subject 
Only to Income Inclusion.--
            (1) Repeal of tax on employer reversions.--Section 4980 of 
        such Code is hereby repealed.
            (2) Employer reversions permitted without plan 
        termination.--Section 420 of such Code is amended to read as 
        follows:

``SEC. 420. TRANSFERS OF EXCESS PENSION ASSETS.

    ``(a) In General.--If there is a qualified transfer of any excess 
pension assets of a defined benefit plan (other than a multiemployer 
plan) to an employer--
            ``(1) a trust which is part of such plan shall not be 
        treated as failing to meet the requirements of section 401(a) 
        or any other provision of law solely by reason of such transfer 
        (or any other action authorized under this section), and
            ``(2) such transfer shall not be treated as a prohibited 
        transaction for purposes of section 4975.
The gross income of the employer shall include the amount of any 
qualified transfer made during the taxable year.
    ``(b) Qualified Transfer.--For purposes of this section--
            ``(1) In general.--The term `qualified transfer' means a 
        transfer--
                    ``(A) of excess pension assets of a defined benefit 
                plan to the employer, and
                    ``(B) with respect to which the vesting 
                requirements of subsection (c) are met in connection 
                with the plan.
            ``(2) Only 1 transfer per year.--No more than 1 transfer 
        with respect to any plan during a taxable year may be treated 
        as a qualified transfer for purposes of this section.
    ``(c) Vesting Requirements of Plans Transferring Assets.--The 
vesting requirements of this subsection are met if the plan provides 
that the accrued pension benefits of any participant or beneficiary 
under the plan become nonforfeitable in the same manner which would be 
required if the plan had terminated immediately before the qualified 
transfer (or in the case of a participant who separated during the 1-
year period ending on the date of the transfer, immediately before such 
separation).
    ``(d) Definition and Special Rule.--For purposes of this section--
            ``(1) Excess pension assets.--The term `excess pension 
        assets' means the excess (if any) of--
                    ``(A) the amount determined under section 
                412(c)(7)(A)(ii), over
                    ``(B) the greater of--
                            ``(i) the amount determined under section 
                        412(c)(7)(A)(i), or
                            ``(ii) 125 percent of current liability (as 
                        defined in section 412(c)(7)(B)).
        The determination under this paragraph shall be made as of the 
        most recent valuation date of the plan preceding the qualified 
        transfer.
            ``(2) Coordination with section 412.--In the case of a 
        qualified transfer--
                    ``(A) any assets transferred in a plan year on or 
                before the valuation date for such year (and any income 
                allocable thereto) shall, for purposes of section 412, 
                be treated as assets in the plan as of the valuation 
                date for such year, and
                    ``(B) the plan shall be treated as having a net 
                experience loss under section 412(b)(2)(B)(iv) in an 
                amount equal to the amount of such transfer and for 
                which amortization charges begin for the first plan 
                year after the plan year in which such transfer occurs, 
                except that such section shall be applied to such 
                amount by substituting `10 plan years' for `5 plan 
                years'.''.

SEC. 104. REPEAL OF ALTERNATIVE MINIMUM TAX.

    Part VI of subchapter A of chapter 1 of the Internal Revenue Code 
of 1986 is hereby repealed.

SEC. 105. REPEAL OF CREDITS.

    Part IV of subchapter A of chapter 1 of the Internal Revenue Code 
of 1986 is hereby repealed.

SEC. 106. REPEAL OF ESTATE AND GIFT TAXES AND OBSOLETE INCOME TAX 
              PROVISIONS.

    (a) Repeal of Estate and Gift Taxes.--
            (1) In general.--Subtitle B of the Internal Revenue Code of 
        1986 is hereby repealed.
            (2) Effective date.--The repeal made by paragraph (1) shall 
        apply to the estates of decedents dying, and gifts and 
        generation-skipping transfers made, after December 31, 2005.
    (b) Repeal of Obsolete Income Tax Provisions.--
            (1) In general.--Except as provided in paragraph (2), 
        chapter 1 of the Internal Revenue Code of 1986 is hereby 
        repealed.
            (2) Exceptions.--Paragraph (1) shall not apply to--
                    (A) sections 1, 11, and 63 of such Code, as amended 
                by this Act,
                    (B) those provisions of chapter 1 of such Code 
                which are necessary for determining whether or not--
                            (i) retirement distributions are includible 
                        in the gross income of employees, or
                            (ii) an organization is exempt from tax 
                        under such chapter, and
                    (C) subchapter D of such chapter 1 (relating to 
                deferred compensation).

SEC. 107. EFFECTIVE DATE.

    Except as otherwise provided in this title, the amendments made by 
this title shall apply to taxable years beginning after December 31, 
2005.

            TITLE II--SUPERMAJORITY REQUIRED FOR TAX CHANGES

SEC. 201. SUPERMAJORITY REQUIRED.

    (a) In General.--It shall not be in order in the House of 
Representatives or the Senate to consider any bill, joint resolution, 
amendment thereto, or conference report thereon that includes any 
provision that--
            (1) increases any Federal income tax rate,
            (2) creates any additional Federal income tax rate,
            (3) reduces the standard deduction, or
            (4) provides any exclusion, deduction, credit, or other 
        benefit which results in a reduction in Federal revenues.
    (b) Waiver or Suspension.--This section may be waived or suspended 
in the House of Representatives or the Senate only by the affirmative 
vote of three-fifths of the Members, duly chosen and sworn.
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