[Congressional Record Volume 142, Number 124 (Wednesday, September 11, 1996)]
[Extensions of Remarks]
[Pages E1572-E1580]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




     INTRODUCTORY STATEMENT FOR H.R. 4050 VALUE-ADDED TAX PROPOSAL

                                 ______
                                 

                            HON. SAM GIBBONS

                               of florida

                    in the house of representatives

                     Wednesday, September 11, 1996

  Mr. GIBBONS. Mr. Speaker, the United States must have a new revenue 
system. We cannot afford the current system. It costs too much to 
operate. It destroys Americans' confidence in their Government and it 
hurts our economy by exporting American job opportunities.
  Today, I have introduced H.R. 4050, and I have also placed in the 
Congressional Record a statement and a technical description for this 
proposal. This is the best that I have been able to do, drawing upon my 
27 years of experience on the Committee on Ways and Means and my 34 
years in Congress. I welcome discussion and criticism.
  The legislation is comprehensive. First, it repeals all income taxes, 
personal and corporate. Second, it replaces the revenue lost with a 
value-added tax [VAT] on all goods and services at one flat tax rate. 
Third, it recognizes the current individual tax burden and it contains 
a proposal to keep this tax burden as it currently is and has been for 
the last 30 years.
  A value-added tax is paid for by every American consumer which, by 
the way, is the ultimate impact of our current system. It is collected 
by business and remitted by business to the U.S. Government. A VAT 
simply taxes the value of each good and service on its way to the 
ultimate consumer. It does so in a fashion which does not cause the 
rate of taxation to pyramid.


                           the current system

  While raising the revenue we need and achieving some of the goals we 
originally set for it, our income tax system has become a maze of 
complexity, intimidating to almost all taxpayers in its broad scope and 
labyrinthine nature. Because of this complexity, most Americans think 
the Tax Code is unfair. Most believe it allows the wealthiest to escape 
fair taxation and leaves the heavier burden on those less fortunate. On 
average, Federal taxes take about 23.8 percent of family income. At the 
very least, Americans deserve a tax system they can understand and 
trust, one with the consistency that assures that all are paying by the 
same process.
  Businesses, too, feel overly burdened by our tax system. Compliance 
requests, complex forms, and expensive staff are needed to merely 
comply.
  Our current tax system has the effect of exporting our job 
opportunities. Practically all countries have a value-added tax. Their 
VAT is subtracted from the price of their goods are exported to the 
United States. When their goods enter our tax environment, we collect 
little if any U.S. tax. But when our goods and services enter their 
countries, they add their VAT to the price of our goods before they are 
sold. Therefore, our goods, when sold overseas, carry the tax costs of 
two systems but their goods sold in our country are largely exempt from 
taxation. The ultimate impact is to diminish and export our U.S.-based 
job opportunities.


         my proposal for an american value-added tax--h.r. 4050

  The bill I am introducing today would eliminate all of these 
problems. It repeals the individual and corporate income taxes as well 
as the Social Security and Medicare taxes--approximately 90 percent of 
our current Federal taxes. It is my proposal for a single-rate 
subtraction-method value-added tax as a complete replacement for our 
current tax system. I feel confident that this bill will give the 
Congress a strong starting point for this important debate. A technical 
explanation of this bill follows my introductory statement.
  A value-added tax is a tax placed on the sale of goods and services 
at each point where the value of a product is increased instead of 
taxing income as it is received. For example, a tax would be imposed 
when timber was sold. If the purchaser of the timber made it into paper 
and sold the paper, a tax would be placed on the value added by the 
papermaker. The value added by the papermaker would be determined by 
adding up the gross receipts from the sales of paper and subtracting 
the cost of business purchases--for example, timber, equipment, 
chemicals for bleaching, electricity or other energy costs, et cetera. 
Because the tax applies only to businesses, the value-added tax is not 
collected upon the sale of an owner-occupied private residence.
  Under a VAT, American exports would not be taxed because they will be 
taxed when they enter a foreign country--if we taxed them in the United 
States then we cannot be competitive and this will cost us American 
jobs. The tax would apply only to consumption of

[[Page E1573]]

goods and services that takes place in the United States, whether 
imported or domestically produced. All imported goods would have our 
VAT added to this cost.
  My VAT legislation provides a simple, understandable means of 
collecting the revenue the Government needs to operate and satisfying 
our citizens' right to understand their tax burden. All consumers would 
have the same tax rate. The simplicity of this system would improve 
compliance and reduce administrative costs for both the payor and the 
Government.
  Many alternative tax systems purport to be simple, but a close 
examination of the details belies that claim. My VAT has no special 
exemptions or deductions and it has only one rate.


                       distribution of tax burden

  As the Congress considers any alternative to our current system, I 
state quite emphatically that two debates should remain outside of the 
discussion of a new tax system: First the amount of revenue the 
Government raises and spends, and second the distribution of the tax 
burden. The former has been discussed extensively in this 104th 
Congress, and perhaps rightly so, but on any count it is a debate that 
should take place outside of tax reform. The latter, burden 
distribution, should remain as it is--a progressive American system 
that helps the least among us and ensures that those benefiting the 
most from our democratic government and open economy pay their fair 
share. Both must be addressed. Neither should hinder our review of a 
VAT.
  One of my key tenets in formulating a new tax regime is to maintain 
the same degree of progressivity that our current system has. The 
imposition of my VAT would not accomplish that by itself. Title III of 
my bill, the burden adjuster, is designed to keep the tax burden as it 
is now and has been for the last 30 years. Because the estimated 20-
percent rate would likely result in a tax increase compared to current 
law for lower-income Americans and a tax decrease for upper-income 
Americans, my proposal adjusts that result so that, on average, each 
income group would bear the same burden it bears today.
  My goals in designing this burden adjustment are: No. 1 to keep the 
adjustment mechanism itself as simple as possible; and No. 2 to 
minimize the number of taxpayers who would be subject to it. I believe 
that I have succeeded on both counts.
  Since this is a key tax fairness issue, I want to share some details 
on its specifics and how it was developed. The burden adjustment aspect 
of my proposal is very simple. The 50 million taxpayers with incomes of 
less than $30,000 would get a rebate of the value-added tax they would 
pay, and the 17.5 million with incomes above $75,000 would be charged a 
bit extra. The 42 million taxpayers with incomes between $30,000 and 
$75,000 would not have to deal with an income tax at all.
  Specifically, a rebate to low-income--up to $30,000--Americans would 
bring them to their current burden level. The rebate would be phased 
out proportionally, reaching zero at $30,000. The Internal Revenue 
Service would provide a table showing the amount of rebate at each 
income level. Taxpayers would simply look up their income in the table 
in order to know how much their rebate would be. They could file for 
their rebate from the IRS or, as the Secretary may arrange, they could 
receive it along with other cash transfers they may get from the 
Federal Government.
  Taxpayers with income of more than $75,000 would pay a 17-percent 
flat rate on the amount of their adjusted gross incomes that exceeds 
$75,000. This low, flat rate would be sufficient to keep the average 
tax rate of the top 16 percent of the population at its current rate--
under the assumption that they spend all of their income and pay the 
20-percent VAT on their purchases.
  The rebate calculation is very easy and would be done by the IRS. All 
taxpayers would need to do is look up their income in a table. The 
extra assessment calculation is as simple as possible. Taxpayers would 
apply a flat rate to an already familiar measure of income.
  The vast middle-class--those with incomes between $30,000 and 
$75,000--would not have to bother with any of this. They would simply 
pay the VAT when they purchased goods and services. Period. No forms, 
no filing, no IRS.
  So, with my value-added tax, 42 million taxpayers would no longer 
file tax forms of any kind. Another 50 million people would have the 
simple task of applying for a rebate of the VAT they pay, which they 
could look up in a table provided to them. Only 16 percent of all 
current taxpayers--17.5 million out of 110.8 million taxpayers--would 
be required to file and pay the additional assessment.
  No complicated transition rules are needed--this VAT, with its rebate 
system for businesses, eliminates the need.


                               CONCLUSION

  I look forward to vigorous discussion of my proposal with all 
commentators and participants in the policymaking process. It is 
through such dialog that sound changes to our tax laws evolve.
  As we prepare to reform our current tax system, the implications of 
replacement must be fully understood and dealt with. We need to educate 
ourselves. I applaud Ways and Means Committee Chairman Archer for 
holding hearings on this subject.
  I have spent years working on the ideas that I have presented here. 
And the ideas are certainly not mine alone. Hundreds of Americans have 
written on this subject and practically every country on earth with the 
exception of Australia has a form of value added taxation.
  I could not have brought these many ideas together and presented them 
as I have without the help of some very fine and learned professionals: 
Janice Mays, currently chief counsel and staff director for the 
Democratic members of the Committee on Ways and Means who formerly 
served in that capacity for the full committee, John Buckley, currently 
chief tax counsel to the Democratic members of the Committee on Ways 
and Means and former chief of staff to the Joint Committee on Taxation 
and prior to that assistant legislative counsel to the House of 
Representatives; Kathleen O'Connell, chief economist for the Democratic 
members of the Committee on Ways and Means and former deputy assistant 
director for tax analysis at the Congressional Budget Office, Ellen 
Dadisman, Frank Phifer and others on our Democratic staff. I have also 
received much assistance from many other generous public servants.
  Numerous others, particularly those in the private sector, have 
studied, written, and discussed for endless hours with me on this 
subject. Nothing is perfect and nothing is ever final, but this is the 
best that I have been able to do. Your input is welcomed. I would be 
glad to respond to all comments.

                   Technical Description of H.R. 4050

       The bill consists of three titles. The bill's provisions 
     take effect on January 1, 1998.


                                title i

       Title I of the bill repeals the individual and corporate 
     income taxes (including the minimum taxes), and the 
     employment taxes used to fund the Social Security and 
     Medicare programs. These repealed taxes constitute 
     approximately 90 percent of current Federal revenues. The 
     bill maintains the current funding of those programs by 
     dedicating a portion of the revenues raised from the value-
     added tax imposed by Title II of the bill to the appropriate 
     trust funds for such programs.


                                title ii

       Title II of the bill imposes a broad-based, single rate, 
     subtraction method, value-added tax. Businesses would collect 
     and remit the tax. The estimated rate of the tax would be 20 
     percent. The 20 percent rate is an estimate of the rate that, 
     in combination with the burden adjustment provisions of title 
     III, will result in the bill being both revenue neutral and 
     distributionally neutral. The rate was selected to minimize 
     the number of taxpayers affected by the burden adjustment 
     provisions.
       Except for an exception for very small businesses, all 
     persons engaged in business activities in the United States 
     would be responsible for collecting and remitting the value-
     added tax. Businesses with gross receipts of less than 
     $12,000 per year would be exempt from the tax unless they 
     waive that exemption. For this purpose, the term ``business 
     activity'' means the sale of property in the United States, 
     the grant of the right to use property in the United States, 
     and the performance of services in the United States other 
     than as an employee. Such activities would be subject to the 
     value-added tax if they are carried on continuously or 
     regularly, regardless of profit motive.
       The amount of the value added by any business during any 
     taxable period would be computed under the subtraction 
     method. The business would total its gross receipts from 
     business activities for the taxable period and then subtract 
     the amount (referred to as ``business purchases'') paid by 
     the business during the taxable period for products and 
     services to be used or sold in the business activity. 
     Business purchases do not include amounts paid for 
     employee compensation. If the amount paid for business 
     purchases during any taxable period exceeds the business 
     gross receipts for that taxable period, the business would 
     be entitled to a refund equal to the VAT rate times that 
     excess.
       The value-added tax would be adjusted at the international 
     border. In the case of exports, the adjustment would be made 
     by excluding gross receipts from exports of goods and 
     services from business gross receipts. Business purchases 
     would include the cost of goods and services used to produce 
     exported goods and services, thereby refunding to the 
     exporter the value-added tax embedded in the price of those 
     goods and services. In the case of imports, the adjustment 
     would be made by excluding purchases of imported products or 
     services in computing the amount of business purchases. There 
     are also provisions that would refund the value-added tax to 
     persons (such as tourists) making nonbusiness purchases of 
     property in the United States for use outside the United 
     States. There would be a tax on nonbusiness imports of 
     property or services into the United States.

[[Page E1574]]

       Businesses engaged in providing financial services would be 
     subject to the value-added tax based on the value of the 
     financial intermediation services that they provide. Those 
     businesses could specify that a portion of the amounts they 
     receive such as interest are implicit fees for financial 
     intermediation services and the amount so specified would be 
     treated as a deductible business purchase by the person 
     paying the interest. Except for businesses engaged in 
     providing financial services, dividends, interest, and other 
     returns from financial assets would be excluded from gross 
     receipts for purposes of the value-added tax.
       There are rules for goods and services furnished by 
     governmental entities and tax-exempt organizations. Those 
     goods and services would be exempt from the value-added tax 
     unless there is a separate charge imposed. If the full cost 
     of the goods or services is not covered by the amounts 
     charged for them, the entity cannot deduct the portion of its 
     business purchases funded from other sources in computing its 
     value added. Public utility services, mass transit services, 
     and postal services furnished by governmental entities would 
     be subject to the tax even if there is no separate charge.


                               title iii

       Title III of the bill provides a rebate of the value-added 
     tax to low-income individuals and imposes an assessment on 
     high-income individuals.
       Individuals whose adjusted net income for a year does not 
     exceed $30,000 would be eligible for a rebate of the value-
     added tax. The amount of the rebate would be the applicable 
     percentage of the individual's adjusted net income. The 
     applicable percentage is 20 percent reduced by two-thirds of 
     one percent for each whole $1,000 of the individual's 
     adjusted net income. For the purposes of the rebate, adjusted 
     net income includes the value of some non-indexed Federal 
     transfer payments received during the year.
       Individuals would be eligible to receive a rebate only if 
     they are citizens and residents of the United States for the 
     entire year, have a principal place of abode in the United 
     States for more than half the year, and are not the dependent 
     of another taxpayer.
       The bill contains provisions for the advance payment of the 
     rebate by employers. These provisions are similar to the 
     provisions of current law which provide for advance payment 
     of the earned income credit.
       Taxpayers with net incomes over $75,000 would be required 
     to pay an assessment equal to 17 percent of their net income 
     under current law except that net income would include:
       1. tax-exempt interest,
       2. foreign earned income excludable under current Internal 
     Revenue Code section 911, and
       3. items of elective deferred compensation and nonqualified 
     deferred compensation when there is not a substantial risk of 
     forfeiture.
       The bill's change in the treatment of nonqualified deferred 
     compensation is necessary to prevent avoidance of the bill's 
     assessment. The bill repeals the corporate income tax and 
     therefore eliminates the current-law impediments to the use 
     of nonqualified deferred compensation.
       In addition, the bill contains provisions to prevent 
     corporations from being used to avoid the assessment. The 
     undistributed income of closely held corporations would be 
     deemed distributed to their shareholders.

                               H.R. 4050

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

     SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.

       (a) In General.--This Act may be cited as the ``Revenue 
     Restructuring Act of 1996''.
       (b) Fundamental Principles for Tax Restructuring.--The 
     provisions of this Act are a substitute for the current 
     Federal income taxes and social security and medicare 
     employment taxes and are designed to meet the following 
     principles which should govern all proposals for fundamental 
     tax reform:
       (1) Revenue neutrality.--The debate about the best method 
     by which the Government raises revenue should not be confused 
     with the issue of how much revenue the Government should 
     raise.
       (2) Fairness.--Equitable distribution of the tax burden is 
     of paramount importance. Tax reform should not be used as an 
     opportunity to alter the current distribution of the burden 
     of Federal taxes.
       (3) Simplicity.--Much of the unhappiness with the current 
     Federal tax system arises from its perceived complexity. Tax 
     reform should focus on the creation of a truly simpler 
     system, thereby avoiding the ill will and skepticism 
     generated by the current Federal tax system.
       (4) Economic efficiency.--A good revenue system should 
     minimize interference in economic markets. It should result 
     in the least amount of distortion and bias, should encourage 
     economic growth, and should promote the vigor and 
     competitiveness of American companies.
       (5) International competitiveness.--The current income tax 
     is an impediment to maximum competitiveness of American 
     companies in international markets. Any reform proposal 
     should be border-adjustable and promote the competitiveness 
     of American companies.
       (c) Responsibilities of Department of Treasury.--The rate 
     of the value added tax and the burden adjustment provisions 
     contained in this Act are tentative and intended to be both 
     revenue neutral and distributionally neutral. The Secretary 
     of the Treasury shall, within 90 days after the date of the 
     enactment of this Act, submit to the Committee on Ways and 
     Means of the House of Representatives such adjustments to--
       (1) the rate of the tax imposed by title II of this Act, 
     and
       (2) the burden adjustments established by title III of this 
     Act,

     to ensure that the provisions of this Act do not result in a 
     significant change in the amount of Federal revenues or in 
     the distribution of the Federal tax burden.
       (d) Amendment of 1986 Code.--Except as otherwise expressly 
     provided, whenever in this Act an amendment or repeal is 
     expressed in terms of an amendment to, or repeal of, a 
     section or other provision, the reference shall be considered 
     to be made to a section or other provision of the Internal 
     Revenue Code of 1986.
       (e) Table of Contents.--

Sec. 1. Short title; amendment of 1986 Code.

  TITLE I--REPEAL OF INDIVIDUAL AND CORPORATE INCOME TAXES AND SOCIAL 
                      SECURITY AND MEDICARE TAXES

Sec. 101. Repeal of individual and corporate income taxes.
Sec. 102. Repeal of social security and medicare taxes.

                       TITLE II--VALUE ADDED TAX

Sec. 201. Imposition of value added tax.

                     ``Subtitle L--Value Added Tax

                     ``Chapter 100--Value Added Tax


                   ``SUBCHAPTER A--IMPOSITION OF TAX

``Sec. 10001. Tax imposed.


                   ``SUBCHAPTER B--COMPUTATION OF TAX

``Sec. 10011. Taxable value added.
``Sec. 10012. Business activity.
``Sec. 10013. Gross receipts from business activities.
``Sec. 10014. Business purchases.
``Sec. 10015. Exemption for certain nontaxable exchanges.


                     ``SUBCHAPTER C--GENERAL RULES

``Sec. 10021. Accounting methods.
``Sec. 10022. Governmental entities and exempt organizations.
``Sec. 10023. Post-sale price adjustments and refunds; bad debts.
``Sec. 10024. Source rules.
``Sec. 10025. Conversions.


                     ``SUBCHAPTER D--SPECIAL RULES

``Sec. 10031. International transportation services.
``Sec. 10032. Financial intermediation services.
``Sec. 10033. Nonbusiness imports of property or services.
``Sec. 10034. Refund for certain nonbusiness purchases.


                ``SUBCHAPTER E--SMALL BUSINESS EXEMPTION

``Sec. 10041. Small business exemption.


                      ``SUBCHAPTER F--DEFINITIONS

``Sec. 10051. Definitions.


                     ``SUBCHAPTER G--ADMINISTRATION

``Sec. 10061. Liability for tax.
``Sec. 10062. Time for filing return; taxable period.
``Sec. 10063. Treatment of related businesses.
``Sec. 10064. Secretary to be notified of certain events.
``Sec. 10065. Regulations.
Sec. 202. Refund authority.
Sec. 203. Dedication of portion of VAT revenues to Social Security 
              Trust Funds.

                     TITLE III--BURDEN ADJUSTMENTS

Sec. 301. Rebate of value added tax to low-income individuals; burden 
              assessment on high-income individuals.

            ``Chapter 7--Value Added Tax Burden Adjustments


            ``SUBCHAPTER A--REBATE TO LOW-INCOME INDIVIDUALS

``Sec. 1601. Rebate to low-income individuals.
``Sec. 1602. Advance payment of rebate.


      ``SUBCHAPTER B--BURDEN ASSESSMENT ON HIGH-INCOME INDIVIDUALS

``Sec. 1611. Assessment on high-income individuals.
``Sec. 1612. Inclusion of undistributed income of certain corporations.
  TITLE I--REPEAL OF INDIVIDUAL AND CORPORATE INCOME TAXES AND SOCIAL 
                      SECURITY AND MEDICARE TAXES

     SEC. 101. REPEAL OF INDIVIDUAL AND CORPORATE INCOME TAXES.

       (a) In General.--Subchapter A of chapter 1 (relating to 
     normal taxes and surtaxes) is hereby repealed.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to taxable years beginning after December 31, 
     1997.

     SEC. 102. REPEAL OF SOCIAL SECURITY AND MEDICARE TAXES.

       (a) In General.--
       (1) Chapter 21 (relating to Federal Insurance Contributions 
     Act) is hereby repealed.
       (2) Chapter 2 (relating to self-employment tax) is hereby 
     repealed.
       (b) Repeal of Tier 1 Railroad Retirement Taxes.--
       (1) Subsection (a) of section 3201 (relating to tax on 
     employees) is hereby repealed.
       (2) Subsection (a) of section 3211 (relating to tax on 
     employee representatives) is amended by striking paragraph 
     (1).
       (3) Section 3221 (relating to tax on employers) is amended 
     by striking subsections (a) and (e).

[[Page E1575]]

       (4) Paragraph (2) of section 3231(e) is amended--
       (A) by striking clause (iii) of subparagraph (A), and
       (B) by striking subparagraph (B) and inserting the 
     following new subparagraph:
       ``(B) Applicable base.--The term 'applicable base' means 
     for any calendar year the contribution and benefit base 
     determined under section 230 of the Social Security Act for 
     such calendar year; except that--
       ``(i) for purposes of this chapter, and
       ``(ii) computing average monthly compensation under section 
     3(j) of the Railroad Retirement Act of 1974 (except with 
     respect to annuity amounts determined under subsection (a) or 
     (f)(3) of section 3 of such Act),

     clause (2) of the first sentence, and the second sentence, of 
     subsection (c) of section 230 of the Social Security Act 
     shall be disregarded.''
       (4) Subsection (e) of section 3231 is amended by striking 
     paragraph (4).
       (c) Effective Date.--
       (1) In general.--The amendments made by this section (other 
     than subsection (a)(2)) shall apply to remuneration paid 
     after December 31, 1997.
       (2) Self-employment tax.--The amendment made by subsection 
     (a)(2) shall apply to taxable years beginning after December 
     31, 1997.
                       TITLE II--VALUE ADDED TAX

     SEC. 201. IMPOSITION OF VALUE ADDED TAX.

       The Internal Revenue Code of 1986 is amended by adding at 
     the end the following new subtitle:
                     ``Subtitle L--Value Added Tax
``Chapter 100. Value added tax.

                     ``CHAPTER 100--VALUE ADDED TAX

``Subchapter A. Imposition of tax.
``Subchapter B. Computation of tax.
``Subchapter C. General rules.
``Subchapter D. Special rules.
``Subchapter E. Small business exemption.
``Subchapter F. Definitions.
``Subchapter G. Administration.

                   ``Subchapter A--Imposition of Tax

``Sec. 10001. Tax imposed.

     ``SEC. 10001. TAX IMPOSED.

       ``In the case of any person engaged in any business 
     activity, there is hereby imposed for each taxable period a 
     tax in an amount equal to 20 percent of the taxable value 
     added.

                   ``Subchapter B--Computation of Tax

``Sec. 10011. Taxable value added.
``Sec. 10012. Business activity.
``Sec. 10013. Gross receipts from business activities.
``Sec. 10014. Business purchases.
``Sec. 10015. Exemption for certain nontaxable exchanges.

     ``SEC. 10011. TAXABLE VALUE ADDED.

       ``(a) In General.--For purposes of this chapter, the term 
     `taxable value added' means the amount by which--
       ``(1) the gross receipts of any person from business 
     activities for a taxable period, exceed
       ``(2) the business purchases of such person for the taxable 
     period.
       ``(b) Refund If Business Purchases Exceed Gross Receipts.--
     If the business purchases described in subsection (a)(2) 
     exceeds the gross receipts described in subsection (a)(1) for 
     any taxable period, an amount equal to 20 percent of such 
     excess shall be treated as an overpayment of the tax imposed 
     by section 10001 for such period.

     ``SEC. 10012. BUSINESS ACTIVITY.

       ``(a) In General.--For purposes of this chapter, the term 
     `business activity' means--
       ``(1) any of the following transactions by any person in 
     connection with a business--
       ``(A) any sale of property in the United States,
       ``(B) any grant of a right to use property in the United 
     States, and
       ``(C) the performance of services in the United States, and
       ``(2) the export of property or services from the United 
     States in connection with a business.

     For purposes of the preceding sentence, the term `property' 
     does not include any financial instrument (as defined in 
     section 10051) or money.
       ``(b) Exception for Services Performed as Employee.--For 
     purposes of this chapter, the term `business activity' does 
     not include the performance of services by an employee for 
     the employee's employer.

     ``SEC. 10013. GROSS RECEIPTS FROM BUSINESS ACTIVITIES.

       ``(a) In General.--For purposes of this chapter, the term 
     `gross receipts' means all receipts from a business activity.
       ``(b) Exports.--
       ``(1) General rule.--For purposes of this chapter, the term 
     `gross receipts' does not include amounts received by the 
     exporter for property or services exported from the United 
     States for use or consumption outside the United States.
       ``(2) Export through nonbusiness entity.--For purposes of 
     paragraph (1), if property or services are sold to a 
     governmental entity or exempt organization for export and are 
     exported other than in a business activity of such entity or 
     organization, then the seller of such property or services is 
     deemed to be the exporter thereof.
       ``(3) International transportation.--

  ``For treatment of international transportation services, see section 
10031.

       ``(c) Exchanges.--For purposes of this chapter, the amount 
     treated as gross receipts from an exchange is the amount of 
     money plus the fair market value of other consideration 
     received in the exchange.
       ``(d) Certain Insurance Proceeds.--For purposes of this 
     chapter, the term `gross receipts' includes the proceeds of 
     property and casualty insurance for losses in connection with 
     a business activity.
       ``(e) Taxes.--For purposes of this chapter, the term `gross 
     receipts' shall not include--
       ``(1) any separately stated excise tax, sales tax, customs 
     duty, or other levy imposed by a Federal, State, or local 
     government which is imposed on a business transaction and 
     which is received or collected by the seller in connection 
     with the sale, and
       ``(2) any tax imposed by chapter 31, 32, 33, 34, 35, 36, 
     39, 51, 52, or 53.
       ``(f) Transfers to Related Persons.--
       ``(1) In general.--For purposes of this chapter, the amount 
     treated as the gross receipts from any transaction described 
     in section 10012(a)(1) between related persons shall be the 
     fair market value of the property sold, right granted, or 
     services performed (as the case may be).
       ``(2) Related person.--For purposes of this subsection, the 
     term `related person' means--
       ``(A) in the case of an employment relationship, an 
     employer and employee,
       ``(B) in the case of any entity, an owner of the entity,
       ``(C) any person specified in regulations, and
       ``(D) any member of the family (within the meaning of 
     section 267(c)(4)) of any individual described in 
     subparagraph (A), (B), or (C).
       ``(3) Owner.--For purposes of paragraph (2), the term 
     `owner' means--
       ``(A) the proprietor of a sole proprietorship, and
       ``(B) any holder of a beneficial interest in a corporation, 
     partnership, trust, or other entity.

     ``SEC. 10014. BUSINESS PURCHASES.

       ``(a) In General.--For purposes of this chapter, the term 
     `business purchase' means any amount paid or incurred to 
     acquire property, a right to use property, or services for 
     use or sale in a business activity. For purposes of the 
     preceding sentence, the term `property' does not include any 
     financial instrument or money.
       ``(b) Exceptions.--The term `business purchase' does not 
     include--
       ``(1) any amount paid or incurred as current or deferred 
     compensation to employees or for employee benefits,
       ``(2) any payment which is unlawful under Federal, State, 
     or local law, or
       ``(3) except as provided in subsection (d)--
       ``(A) any amount paid or incurred as a premium for 
     insurance other than property and casualty insurance, or
       ``(B) any other implicit intermediation fees.
       ``(c) Imports.--The term `business purchase' does not 
     include--
       ``(1) any amount paid or incurred for the import of 
     property or services, and
       ``(2) in the case of imported property, any amounts paid or 
     incurred for the transportation of such property to the 
     United States (if such costs are not included in the amount 
     paid for the property).
       ``(d) Financial Intermediation Services.--
       ``(1) In general.--For purposes of this chapter, business 
     purchases include implicit financial intermediation fees.
       ``(2) Implicit financial intermediation fees.--For purposes 
     of paragraph (1), the term `implicit financial intermediation 
     fees' means amounts allocable to the business activity for 
     which a person has received notice under section 10032(d) 
     (relating to implicit financial intermediation fees) and 
     which have otherwise not been taken into account.
       ``(3) Cross reference.--

  For additional treatment of financial intermediation services, see 
section 10032.

       ``(e) Exchanges.--For purposes of this chapter, the amount 
     treated as paid or incurred for business purchases in 
     connection with an exchange is the amount of money plus the 
     fair market value of other consideration transferred in the 
     exchange.
       ``(f) Taxes.--For purposes of this chapter, the term 
     `business purchase' does not include any excise tax, sales 
     tax, customs duty, or other separately stated levy imposed by 
     a Federal, State, or local government on business purchases.
       ``(g) Gambling Payments.--Except as provided in subsection 
     (a), in the case of a business activity involving gambling, 
     lotteries, or other games of chance, business purchases 
     include amounts paid to winners.

     ``SEC. 10015. EXEMPTION FOR CERTAIN NONTAXABLE EXCHANGES.

       ``(a) General Rule.--For purposes of this chapter, gross 
     receipts shall not include gross receipts from an applicable 
     nontaxable transaction except to the extent attributable to 
     money or other property received in the transaction.
       ``(b) Applicable Nontaxable Transactions.--For purposes of 
     this section, the term `applicable nontaxable transaction' 
     means any transaction--
       ``(1) to which section 332, 351, 368, or 721 applies, or
       ``(2) which is specified by the Secretary and with respect 
     to which gain is not recognized in whole or in part under 
     chapter 1.

                     ``Subchapter C--General Rules

``Sec. 10021. Accounting methods.

[[Page E1576]]

``Sec. 10022. Governmental entities and exempt organizations.
``Sec. 10023. Post-sale price adjustments and refunds; bad debts.
``Sec. 10024. Source rules.
``Sec. 10025. Conversions.

     ``SEC. 10021. ACCOUNTING METHODS.

       ``(a) In General.--Except as provided in this section, a 
     person subject to tax under this chapter may use any of the 
     following methods of accounting for purposes of this chapter:
       ``(1) The cash receipts and disbursements method.
       ``(2) An accrual method.
       ``(3) Any other method permitted by the Secretary.

     The Secretary may require a person to modify any method to 
     clearly reflect gross receipts and business purchases.
       ``(b) Consistency Requirement.--All persons which are 
     members of a controlled group of corporations which does not 
     elect to be treated as one person for purposes of this 
     chapter under section 10063(a)(2) shall use the same method 
     of accounting for purposes of this chapter.
       ``(c) Special Rules for Long-Term Contracts.--
       ``(1) In general.--In the case of any sale pursuant to a 
     long-term contract (as defined in section 460(f))--
       ``(A) the seller shall use the percentage of completion 
     method in computing gross receipts from the contract, and
       ``(B) the purchaser shall use the cash receipts and 
     disbursements method in computing business purchases from the 
     contract.
       ``(2) Reporting.--The Secretary may require taxpayers to 
     file statements containing such information with respect to 
     long-term contracts as the Secretary may prescribe.
       ``(d) Installment Method Prohibited.--Gross receipts from 
     the sale of property shall not be taken into account for 
     purposes of this chapter under the installment method.

     ``SEC. 10022. GOVERNMENTAL ENTITIES AND EXEMPT ORGANIZATIONS.

       ``(a) In General.--For purposes of this chapter, the 
     transfer of property, the grant of a right to use property, 
     or the furnishing of services by a governmental entity or an 
     exempt organization shall be treated as a business activity 
     if there is a separately stated charge for such transfer, 
     grant, or furnishing.
       ``(b) Special Rules for Governmental Entities.--For 
     purposes of this chapter--
       ``(1) In general.--The transfer of property, the grant of a 
     right to use property, or furnishing of services by a 
     governmental entity with respect to any of the following 
     activities shall be treated as a business activity whether or 
     not there is a separately stated charge for such transfer or 
     furnishing:
       ``(A) Public utility services.
       ``(B) Mass transit services.
       ``(C) Postal services.
       ``(D) Any activity not involving the exercise of any 
     essential governmental function (within the meaning of 
     section 115).
       ``(2) Gross receipts.--In the case of a transfer of 
     property, grant of a right to use property, or furnishing of 
     services which is treated as a business activity solely by 
     reason of paragraph (1), gross receipts shall be determined 
     on the basis of the fair market value of such property, 
     right, or services.
       ``(c) Business Purchases Reduced By Subsidies.--
       ``(1) In general.--For purposes of this chapter, in the 
     case of a business activity of an exempt organization or a 
     governmental entity (other than an activity which is treated 
     as a business activity solely by reason of subsection 
     (b)(1)), the business purchases for such activity shall be 
     reduced by the amount of any subsidy provided for that 
     activity.
       ``(2) Subsidy.--For purposes of paragraph (1), the term 
     `subsidy' means the portion of the cost of the transfer of 
     property, the right to use property, or the furnishing of 
     services, which is not borne by amounts charged therefor.
       ``(d) Allocation.--The Secretary shall by regulation 
     provide for the proper allocation of gross receipts and 
     business purchases between business activities and other 
     activities.
       ``(e) Self-Consumption of Property or Services.--
     Notwithstanding the provisions of this section, the Secretary 
     may by regulation provide that property produced, or services 
     furnished, by a governmental entity or an exempt organization 
     for use by itself are to be treated as sold in a business 
     activity if such treatment is necessary to carry out the 
     purposes of this chapter. In any such case the taxable value 
     added shall be determined by reference to the fair market 
     value of the property or services.

     ``SEC. 10023. POST-SALE PRICE ADJUSTMENTS AND REFUNDS; BAD 
                   DEBTS.

       ``(a) Price Adjustments and Refunds.--
       ``(1) Receipt treated as reduction in business purchases.--
     If a person subject to tax under this chapter receives a 
     post-sale price adjustment attributable to a business 
     purchase which was taken into account in computing the 
     taxable value added for a prior taxable period, then the 
     amount of such adjustment shall be treated as a reduction in 
     business purchases for the taxable period in which it is 
     received.
       ``(2) Issuance treated as reduction in gross receipts.--If 
     a person subject to tax under this chapter issues a post-sale 
     price adjustment for a sale the gross receipts from which 
     were taken into account in computing the taxable value added 
     for a prior taxable period, then the amount of such 
     adjustment shall be treated as a reduction in gross receipts 
     for the taxable period in which it is issued.
       ``(3) Post-sale price adjustment.--For purposes of this 
     subsection, the term `post-sale price adjustment' means a 
     refund, rebate, or other price allowance attributable to a 
     sale of property or services.
       ``(b) Bad Debts.--
       ``(1) Seller.--
       ``(A) Writeoffs and writedowns.--If an amount owed to a 
     seller of business property or services that was taken into 
     account as gross receipts in computing the taxable value 
     added of the seller for a prior taxable period becomes wholly 
     or partially uncollectible during any subsequent taxable 
     period, then the seller shall treat the amount (or part 
     thereof that is uncollectible) as a reduction in gross 
     receipts for the taxable period in which it becomes wholly or 
     partially uncollectible.
       ``(B) Notice.--Whenever a seller treats an amount as wholly 
     or partially uncollectible under subparagraph (A), the seller 
     shall notify the purchaser of the amount the seller is 
     treating as uncollectible. The notice shall set forth with 
     specificity the purchase or purchases to which the treatment 
     relates and shall be sent to the purchaser at the purchaser's 
     last known address within 10 days after close of the taxable 
     period in which the seller treats the amount as wholly or 
     partially uncollectible.
       ``(C) Recoveries.--If a seller receives payment for an 
     amount that was treated as a reduction in gross receipts 
     under subparagraph (A) in a prior taxable period, then the 
     seller shall treat the payment as a gross receipt for the 
     taxable period in which it is received.
       ``(2) Purchaser.--
       ``(A) Writeoffs and writedowns.--If a purchaser receives 
     notice under paragraph (1)(B) from a seller for all or a 
     portion of the amount owed for business property or services 
     that the purchaser treated as a business purchase in a prior 
     taxable period, then the purchaser shall treat such amount as 
     a reduction in business purchases for the taxable period in 
     which the notice is received.
       ``(B) Repayments.--If a purchaser pays all or part of an 
     amount treated as a reduction in business purchases under 
     subparagraph (A) in a prior taxable period, then the 
     purchaser shall treat the amount paid as a business purchase 
     for the taxable period in which the payment is made.

     ``SEC. 10024. SOURCE RULES.

       ``(a) Sales of Property.--For purposes of this chapter, a 
     sale of property shall be treated as occurring in the United 
     States if the property is located in the United States at the 
     time of the sale.
       ``(b) Right To Use Property.--For purposes of this chapter, 
     the grant of a right to use property shall be treated as 
     occurring in the United States to the extent such right 
     involves the use of such property in the United States.
       ``(c) Sales of Services.--
       ``(1) General rule.--For purposes of this chapter, a sale 
     of services shall be treated as occurring in the United 
     States to the extent that--
       ``(A) the services are provided from a place of business, 
     or with respect to property, in the United States, or
       ``(B) the services are incidental to the provision of 
     services within the United States.
       ``(2) Cross reference.--

  ``For treatment of international transportation services, see section 
10031.

     ``SEC. 10025. CONVERSIONS.

       For purposes of this chapter, any conversion of property or 
     services from use in a business activity to use in any other 
     activity, or from use in any other activity to use in a 
     business activity, shall be treated as a sale of the property 
     or services for their fair market value.

                     ``Subchapter D--Special Rules

``Sec. 10031. International transportation services.
``Sec. 10032. Financial intermediation services.
``Sec. 10033. Nonbusiness imports of property or services.
``Sec. 10034. Refund for certain nonbusiness purchases.

     ``SEC. 10031. INTERNATIONAL TRANSPORTATION SERVICES.

       ``(a) Exports.--For purposes of this chapter, in the case 
     of property exported from the United States--
       ``(1) Gross Receipts.--The term `gross receipts' does not 
     include receipts from transportation of such property from 
     the United States.
       ``(2) Business Purchases.--The term `business purchase' 
     does not include amounts paid or incurred for transportation 
     of such property from the United States.
       ``(b) International Transportation of Passengers.--For 
     purposes of this chapter--
       ``(1) Gross receipts.--Gross receipts--
       ``(A) do not include receipts from the transportation of 
     passengers from outside the United States to a destination in 
     the United States, but
       ``(B) include receipts from the transportation of 
     passengers from the United States to a destination outside 
     the United States.
       ``(2) Business purchases.--Business purchases--
       ``(A) do not include amounts paid or incurred in a business 
     activity for the transportation of passengers from outside 
     the

[[Page E1577]]

     United States to a destination in the United States, but
       ``(B) include amounts paid or incurred in a business 
     activity for the transportation of passengers from the United 
     States to a destination outside the United States.

     ``SEC. 10032. FINANCIAL INTERMEDIATION SERVICES.

       ``(a) General Rule.--For purposes of this chapter--
       ``(1) the providing of financial intermediation services 
     shall be treated as a business activity, and
       ``(2) this chapter shall be applied to such business 
     activity by substituting financial receipts and adjusted 
     business purchases properly allocable to such business 
     activity for gross receipts and business purchases.
       ``(b) Financial Receipts.--For purposes of this section, 
     the term `financial receipts' means all receipts other than 
     amounts received as contributions to capital.
       ``(c) Adjusted Business Purchases.--For purposes of this 
     section, the term `adjusted business purchases' means 
     business purchases, adjusted as follows:
       ``(1) Principal and interest.--Business purchases include 
     any principal or interest payments properly allocable to the 
     business activity described in subsection (a).
       ``(2) Financial instruments.--Notwithstanding any other 
     provision of this chapter, business purchases include the 
     cost of, and payments under, financial instruments (other 
     than financial instruments representing equity interests in 
     the person subject to the tax imposed by this chapter).
       ``(3) Insurance claims.--Business purchases include claims 
     and cash surrender values paid in connection with insurance 
     or reinsurance services.
       ``(4) Reinsurance.--Business purchases include amounts paid 
     for reinsurance.
       ``(d) Reporting to Customers.--
       ``(1) Allocation and reporting.--
       ``(A) In general.--A person engaged in the business 
     activity of providing financial intermediation services 
     shall--
       ``(i) allocate fees received for such services (other than 
     services for which separately stated fees are charged) among 
     recipients of such services on a reasonable and consistent 
     basis, and
       ``(ii) report to each recipient the fees so allocated.
       ``(B) Timing.--The report under subparagraph (A)(ii) shall 
     be furnished to the recipient no later than the 45th day 
     after the close of a taxable period.
       ``(2) Exception.--The Secretary shall establish procedures 
     under which notice need not be given under this subsection to 
     persons with respect to whom services are not provided in 
     connection with a business activity.
       ``(e) Definitions.--For purposes of this section--
       ``(1) Financial intermediation service.--The term 
     `financial intermediation service' means--
       ``(A) lending services,
       ``(B) insurance services,
       ``(C) market-making and dealer services, and
       ``(D) any other service provided as a business activity in 
     which a person acts as an intermediary in--
       ``(i) the transfer of property, services, or financial 
     assets, liabilities, risks, or instruments (or income or 
     expense derived therefrom) between two or more other persons, 
     or
       ``(ii) the pooling of economic risk among other persons,

     and derives all or a portion of such person's gross receipts 
     from streams of income or expense, discounts, or other 
     financial flows associated with the matter with respect to 
     which such person is acting as an intermediary.
       ``(2) Lending services.--The term `lending services' means 
     the regular making of loans and providing credit to, or 
     taking deposits from, customers, but does not include an 
     installment or delayed payment arrangement provided by a 
     seller of property or services under which additional charges 
     or fees are imposed by the seller for late payment and for 
     which no interest is charged.
       ``(3) Market-making or dealer services.--The term `market-
     making or dealer services' means services provided by a 
     person who--
       ``(A) regularly purchases financial instruments from or 
     sells financial instruments to customers in the ordinary 
     course of a trade or business, or
       ``(B) regularly offers to enter into, assume, offset, 
     assign, or otherwise terminate positions in financial 
     instruments with customers in the ordinary course of a trade 
     or business.

     ``SEC. 10033. NONBUSINESS IMPORTS OF PROPERTY OR SERVICES.

       ``(a) Imposition of Tax.--There is hereby imposed on the 
     taxable nonbusiness import of any property or services a tax 
     equal to 20 percent of the sum of--
       ``(1) the amount paid or incurred for the property or 
     services, plus
       ``(2) in the case of property, any amounts paid or incurred 
     for transportation costs (if such costs are not included in 
     the amount paid for the property).
       ``(b) Taxable Nonbusiness Import.--For purposes of 
     subsection (a), the term `taxable nonbusiness import' means 
     any import of any property or services for use or consumption 
     within the United States unless--
       ``(1) such property or services is imported for use or sale 
     in a business activity of the importer, or
       ``(2) such property is imported free of duty under chapter 
     98 of the Harmonized Tariff Schedule of the United States.

     ``SEC. 10034. REFUND FOR CERTAIN NONBUSINESS PURCHASES.

       ``(a) Refund Allowed.--If the tax imposed by section 10001 
     was paid on any qualified nonbusiness purchase, the Secretary 
     shall pay (without interest) to the purchaser an amount equal 
     to such tax.
       ``(b) Qualified Nonbusiness Purchase.--For purposes of this 
     section, the term `qualified nonbusiness purchase' means any 
     purchase of property or services if--
       ``(1) such purchase is not in connection with a business,
       ``(2) the purchaser establishes to the satisfaction of the 
     Secretary that substantially all of the use of such property 
     or services is outside the United States, and
       ``(3) the amount of the tax imposed by section 10001 on 
     such purchase is separately stated.
       ``(c) Period for Filing Claims.--No claim shall be allowed 
     under this section with respect to any purchase unless filed 
     by the purchaser not later than 180 days after the date of 
     such purchase.

                ``Subchapter E--Small Business Exemption

``Sec. 10041. Small business exemption.

     ``SEC. 10041. SMALL BUSINESS EXEMPTION.

       ``(a) Exemption.--Except as provided in subsection (b), if 
     the aggregate amount of gross receipts of any person for any 
     taxable period and the 3 preceding taxable periods does not 
     exceed the exemption amount, no tax shall be imposed under 
     section 10001 (and no credit or refund shall be allowed under 
     section 10011) for the taxable period.
       ``(b) Exceptions.--
       ``(1) Person must always be exempt.--Subsection (a) shall 
     not apply to any person for a taxable period unless the 
     person was exempt from the tax imposed by section 10001 for 
     all preceding taxable periods.
       ``(2) Election.--Subsection (a) shall not apply to any 
     person for a taxable period if the person elects not to have 
     subsection (a) apply for the taxable period.
       ``(c) Statements.--A person to which this section applies 
     for any taxable period shall file a statement containing such 
     information as the Secretary may prescribe.
       ``(d) Definitions and Special Rules.--For purposes of this 
     section--
       ``(1) Exemption amount.--The term `exemption amount' means 
     $12,000 (or an equivalent amount if the taxable period is not 
     a calendar quarter).
       ``(2) Persons not engaged in business for entire period.--
     If a person was not engaged in a business activity for the 
     entire period referred to in subsection (a), such subsection 
     shall be applied on the basis of the period the person was so 
     engaged.
       ``(3) Predecessors.--Any reference in this section to a 
     person shall include a reference to any predecessor of the 
     person.

                      ``Subchapter F--Definitions

``Sec. 10051. Definitions.

     ``SEC. 10051. DEFINITIONS.

       ``For purposes of this chapter--
       ``(1) Sale of services.--The term `sale of services' means 
     the performance of services for consideration, and includes 
     the granting of a right to the performance of services or to 
     reimbursement (including the granting of warranties, 
     insurance, and similar items) for consideration.
       ``(2) Grant of right to use property.--The term `grant of a 
     right to use property' means the granting of a right to use 
     property for consideration.
       ``(3) Sale of property.--The term `sale of property' means 
     the transfer of ownership of property from a seller to a 
     purchaser for consideration.
       ``(4) Property.--The term `property' means any tangible or 
     intangible property.
       ``(5) Business.--The term `business' includes any activity 
     carried on continuously or regularly, whether or not for 
     profit, that involves or is intended to involve the sale of 
     property, the grant of a right to use property, or the sale 
     of services.
       ``(6) Business property or service.--The term `business 
     property or service' means any property or service the sale 
     of which by the owner or provider thereof would be a business 
     activity or which is used by the owner or provider in a 
     business activity.
       ``(7) Employee.--The term `employee' has the same meaning 
     as when such term is used for purposes of chapter 24 
     (relating to withholding).
       ``(8) Person.--The term `person' has the meaning given such 
     term by section 7701(a)(1), but also includes any 
     governmental entity.
       ``(9) United states.--The term `United States', when used 
     in a geographic sense, includes the customs territory of the 
     United States (as defined in General Headnote 2 of the 
     Harmonized Tariff Schedules of the United States) and any 
     area seaward of the States lying within the outer boundaries 
     of the outer continental shelf (as defined in section 1331 of 
     title 43, United States Code).
       ``(10) Governmental entity.--The term `governmental entity' 
     means the United States, any State or political subdivision 
     thereof, the District of Columbia, a Commonwealth or 
     possession of the United States, or any agency or 
     instrumentality of any of the foregoing.
       ``(11) Exempt organization.--The term `exempt organization' 
     means any organization exempt from taxation under chapter 1.
       ``(12) Financial instrument defined.--The term `financial 
     instrument' means any--
       ``(A) share of stock in a corporation,
       ``(B) partnership or beneficial ownership interest in a 
     widely held or publicly traded partnership or trust,

[[Page E1578]]

       ``(C) note, bond, debenture, or other evidence of 
     indebtedness,
       ``(D) interest rate, currency, or equity notional principal 
     contract,
       ``(E) evidence of an interest in, or a derivative financial 
     instrument in, any financial instrument described in 
     subparagraph (A), (B), (C), or (D), or any currency, 
     including any option, forward contract, short position, and 
     any similar financial instrument in such a financial 
     instrument or currency, and
       ``(F) position which--
       ``(i) is not a financial instrument described in 
     subparagraph (A), (B), (C), (D), or (E),
       ``(ii) is a hedge with respect to such a financial 
     instrument, and
       ``(iii) is clearly identified in the dealer's records as 
     being described in this subparagraph before the close of the 
     day on which it was acquired or entered into (or such other 
     time as the Secretary may by regulations prescribe).
       ``(13) Use includes held for use.--Property or services 
     held for use by any person shall be treated as used by that 
     person.
       ``(14) Exchanges treated as sales.--An exchange shall be 
     treated as a sale.

                     ``Subchapter G--Administration

``Sec. 10061. Liability for tax.
``Sec. 10062. Time for filing return; taxable period.
``Sec. 10063. Treatment of related businesses.
``Sec. 10064. Secretary to be notified of certain events.
``Sec. 10065. Regulations.

     ``SEC. 10061. LIABILITY FOR TAX.

       ``The person selling property, granting the right to use 
     property, or selling services shall be liable for the tax 
     imposed by section 10001.

     ``SEC. 10062. TIME FOR FILING RETURN; TAXABLE PERIOD.

       ``(a) Filing Return.--Before the 16th day of the second 
     calendar month beginning after the close of each taxable 
     period, each person subject to tax under this chapter shall 
     file a return of the tax imposed by section 10001 for such 
     taxable period.
       ``(b) Taxable Period.--For purposes of this chapter--
       ``(1) In general.--The term `taxable period' means a 
     calendar quarter, except that if a taxpayer has a taxable 
     year under chapter 1 other than the calendar year, then such 
     term means a quarter of that taxable year.
       ``(2) Other periods.--To the extent provided in 
     regulations, the term `taxable period' includes a period 
     selected by a person other than a calendar quarter.
       ``(3) Authority to shorten length of tax period.--The 
     Secretary may shorten the length of a person's taxable period 
     under this subsection to the extent the Secretary deems such 
     action necessary to protect the revenue.

     ``SEC. 10063. TREATMENT OF RELATED BUSINESSES.

       ``(a) General Rule.--For purposes of this chapter--
       ``(1) Affiliated groups and businesses under common 
     control.--Except to the extent otherwise provided in 
     regulations--
       ``(A) an affiliated group of corporations (as defined in 
     section 1504(a) without regard to paragraphs (2), (4), and 
     (7) of section 1504(b)), or
       ``(B) two or more businesses (whether or not incorporated) 
     under common control within the meaning of section 52(b) and 
     the regulations thereunder,

     shall be treated as one person.
       ``(2) Controlled group.--A controlled group of 
     corporations, as defined in section 1563(a) (determined 
     without regard to the second sentence of paragraph (4) of 
     such section and without regard to section 1563(e)(3)(C)), 
     may elect to be treated as one person.
       ``(b) Related Party Transactions.--For purposes of this 
     chapter, transactions in the United States between 
     corporations or other businesses that are treated, or that 
     may elect to be treated, as one person under subsection (a) 
     shall not be taken into account in computing the gross 
     receipts or business purchases of any such corporation or 
     business.

     ``SEC. 10064. SECRETARY TO BE NOTIFIED OF CERTAIN EVENTS.

       ``To the extent provided in regulations, each person 
     engaged in a business shall notify the Secretary (at such 
     time or times as may be prescribed by regulation) of--
       ``(1) any change in the form in which the business is 
     conducted, and
       ``(2) any other change that might affect--
       ``(A) the liability for the tax imposed by section 10001,
       ``(B) the amount of such tax or any credit against such 
     tax, or
       ``(C) the administration of such tax in the case of such 
     person.

     ``SEC. 10065. REGULATIONS.

       ``The Secretary shall prescribe such regulations as may be 
     necessary to carry out the provisions of this chapter.''

     SEC. 202. REFUND AUTHORITY.

       Section 6402 (relating to authority to make credits or 
     refunds) is amended by designating subsection (h) as 
     subsection (j) and by inserting after subsection (g) the 
     following new subsection:
       ``(h) Repayment of Value Added Tax.--Within 45 days after 
     the date on which a value added tax return is filed pursuant 
     to section 10062 showing an overpayment, the Secretary shall 
     make, to the extent the Secretary deems practical, a limited 
     examination of the return to discover omissions and errors of 
     computation, and shall determine the amount of the 
     overpayment, if any, for the taxable period to which the 
     return relates and refund the amount of such overpayment to 
     the person who filed the return.''

     SEC. 203. DEDICATION OF PORTION OF VAT REVENUES TO SOCIAL 
                   SECURITY TRUST FUNDS.

       (a) In General.--The Secretary of the Treasury shall 
     deposit in each Social Security Trust Fund for periods after 
     1997 that portion of the revenues from the tax imposed by 
     chapter 100 of the Internal Revenue Code of 1986 which is 
     necessary to maintain each such Fund in the same position it 
     would be in but for the amendments made by section 102 of 
     this Act.
       (b) Social Security Trust Funds.--For purposes of 
     subsection (a), the Social Security Trust Funds are--
       (1) the Federal Old-Age and Survivors Insurance Trust Fund 
     established by section 201(a) of the Social Security Act,
       (2) the Federal Disability Insurance Trust Fund established 
     by section 201(b) of such Act, and
       (3) the Federal Hospital Insurance Trust Fund established 
     by section 1817(a) of such Act.
                     TITLE III--BURDEN ADJUSTMENTS

     SEC. 301. REBATE OF VALUE ADDED TAX TO LOW-INCOME 
                   INDIVIDUALS; BURDEN ASSESSMENT ON HIGH-INCOME 
                   INDIVIDUALS.

       (a) In General.--Subtitle A is amended by adding at the end 
     the following new chapter:

            ``CHAPTER 7--VALUE ADDED TAX BURDEN ADJUSTMENTS

``Subchapter A. Rebate to low-income individuals.
``Subchapter B. Burden assessment on high-income individuals.

            ``Subchapter A--Rebate to Low-Income Individuals

``Sec. 1601. Rebate to low-income individuals.
``Sec. 1602. Advance payment of rebate.

     ``SEC. 1601. REBATE TO LOW-INCOME INDIVIDUALS.

       ``(a) General Rule.--The Secretary shall, for each taxable 
     year, pay to each eligible individual an amount equal to the 
     VAT rebate for such year.
       ``(b) VAT Rebate.--For purposes of this section--
       ``(1) In general.--The VAT rebate for any taxable year is 
     an amount equal to the applicable percentage of so much of 
     the adjusted net income of the eligible individual for such 
     year as does not exceed $30,000.
       ``(2) Applicable percentage.--For purposes of paragraph 
     (1), the applicable percentage is 20 percent reduced (but not 
     below zero) by \2/3\ of 1 percentage point for each whole 
     $1,000 of the individual's adjusted net income.
       ``(3) Adjusted net income.--The term `adjusted net income' 
     means the sum of--
       ``(A) the net income (as defined in section 1611(c)) for 
     the taxable year, plus
       ``(B) the value of specified Federal transfer payments 
     received during the taxable year.
       ``(4) Specified federal transfer payments.--The term 
     `specified Federal transfer payments' means--
       ``(A) aid provided under a State plan approved under part A 
     of title IV of the Social Security Act (relating to aid to 
     families with dependent children),
       ``(B) assistance provided under--
       ``(i) the food stamp program (as defined in section 3(h) of 
     the Food Stamp Act of 1977), or
       ``(ii) the portion of the program under sections 21 and 22 
     of such Act which provides food assistance, and
       ``(C) any other Federal assistance which consists of money 
     payments or script and which is not adjusted for changes in 
     the cost-of-living.
       ``(c) Eligible Individual.--For purposes of this section, 
     the term `eligible individual' means any individual if--
       ``(1) such individual is a citizen or resident of the 
     United States for the entire taxable year,
       ``(2) such individual's principal place of abode is in the 
     United States for more than one-half of such taxable year,
       ``(3) such individual is not a dependent of another 
     taxpayer for any taxable year beginning in the same calendar 
     year as such taxable year, and
       ``(4) such individual's adjusted net income for the taxable 
     year does not exceed $30,000.
       ``(d) Amount of Rebate To Be Determined under Tables.--
       ``(1) In general.--The amount of the rebate allowed by this 
     section shall be determined under tables prescribed by the 
     Secretary.
       ``(2) Requirements for tables.--The tables prescribed under 
     paragraph (1) shall reflect the provisions of subsection (b) 
     and shall have income brackets of not greater than $50 each.
       ``(e) Married Individuals Must File Joint Claim.--In the 
     case of an individual who is married (within the meaning of 
     section 7703), this section shall apply only if a joint claim 
     is filed by such individual and such individual's spouse, and 
     such joint claim shows the combined adjusted net incomes of 
     such individual and spouse.
       ``(f) Coordination With Periodic Payments of Rebate.--If 
     any payment is made to the individual under section 1602 
     during any calendar year or if periodic payments have been 
     made to the individual under this section during any calendar 
     year, then such

[[Page E1579]]

     individual shall pay to the Secretary an amount equal to the 
     excess (if any) of--
       ``(1) the aggregate amount of such payments, over
       ``(2) the maximum amount which would be payable to such 
     individual under this section (for such individual's last 
     taxable year beginning in such calendar year) without regard 
     to such payments and on the basis of the actual adjusted net 
     income of such individual for such taxable year.

     Any amount required to be paid under this subsection shall be 
     assessed and collected in the same manner as tax imposed by 
     chapter 1.
       ``(g) Claim Required To Be Filed, Etc.--
       ``(1) In general.--No payment shall be made under this 
     section unless claim therefor is filed with the Secretary.
       ``(2) Rebate payable with federal transfer payments, 
     etc..--To the maximum extent practical, the Secretary shall 
     arrange for the payment of the rebate under this section to 
     be made with Federal transfer payments and payments of social 
     security benefits.

     ``SEC. 1602. ADVANCE PAYMENT OF REBATE.

       ``(a) General Rule.--Except as otherwise provided in this 
     section, every employer making payment of wages to an 
     employee with respect to whom a VAT rebate eligibility 
     certificate is in effect shall, at the time of paying such 
     wages, make an additional payment to such employee equal to 
     such employee's VAT rebate advance amount.
       ``(b) VAT Rebate Eligibility Certificate.--For purposes of 
     this title, a VAT rebate eligibility certificate is a 
     statement furnished by an employee to the employer which--
       ``(1) certifies that the employee will be eligible to 
     receive payments under section 1601 for the taxable year,
       ``(2) certifies the employee's estimate of his adjusted net 
     income (as defined in section 1601(b)) for the taxable year 
     other than income from wages from such employer, and
       ``(3) certifies--
       ``(A) that the employee does not have another VAT rebate 
     eligibility certificate in effect for the calendar year with 
     respect to the payment of wages by another employer, and
       ``(B) that the spouse of the employee does not have a VAT 
     rebate eligibility certificate in effect.

     For purposes of this section, a certificate shall be treated 
     as being in effect with respect to a spouse if such a 
     certificate will be in effect on the first status 
     determination date following the date on which the employee 
     furnishes the statement in question.
       ``(c) VAT Rebate Advance Amount.---For purposes of this 
     title, the term `VAT rebate advance amount' means, with 
     respect to any payroll period, the amount determined--
       ``(1) on the basis of the employee's wages from the 
     employer for such period and the employee's estimate under 
     subsection (b)(2) of his adjusted net income (as defined in 
     section 1601(b)) for the taxable year other than from such 
     wages, and
       ``(2) in accordance with tables prescribed by the 
     Secretary.
       ``(d) Payments To Be Treated As Payments Value Added Tax.--
       ``(1) In general.--For purposes of this title, payments 
     made by an employer under subsection (a) to his employees for 
     any payroll period--
       ``(A) shall not be treated as the payment of compensation, 
     and
       ``(B) shall be treated as made out of amounts of the taxes 
     imposed for the payroll period under chapter 100 (relating to 
     value added tax), as if the employer had paid to the 
     Secretary, on the day on which the wages are paid to the 
     employees, an amount equal to such payments.
       ``(2) Advance payments exceed taxes due.--In the case of 
     any employer, if for any payroll period the aggregate amount 
     of VAT rebate advance payments exceeds the sum of the amounts 
     referred to in paragraph (1)(B), each such advance payment 
     shall be reduced by an amount which bears the same ratio to 
     such excess as such advance payment bears to the aggregate 
     amount of all such advance payments.
       ``(3) Employer may make full advance payments.--The 
     Secretary shall prescribe regulations under which an employer 
     may elect (in lieu of any application of paragraph (2))--
       ``(A) to pay in full all VAT rebate advance amounts, and
       ``(B) to have additional amounts paid by reason of this 
     paragraph treated as the advance payment of taxes imposed by 
     this title.
       ``(e) Furnishing and Taking Effect of Certificates.--Rules 
     similar to the rules of section 3507(e) shall apply for 
     purposes of this section.

      ``Subchapter B--Burden Assessment on High-Income Individuals

``Sec. 1611. Assessment on high-income individuals.
``Sec. 1612. Inclusion of undistributed income of certain corporations.

     ``SEC. 1611. ASSESSMENT ON HIGH-INCOME INDIVIDUALS.

       ``(a) General Rule.--Each assessable person whose net 
     income for the taxable year exceeds the threshold amount 
     shall pay an assessment for such year equal to 17 percent of 
     the excess (if any) of such income over the threshold amount.
       ``(b) Assessable Person.--For purposes of this subchapter, 
     the term `assessable person' means any individual, estate, or 
     trust other than a trust exempt from taxation under chapter 
     1.
       ``(c) Net Income.--
       ``(1) In general.--For purposes of this section, the term 
     `net income' means adjusted gross income determined with the 
     modifications described in the following paragraphs.
       ``(2) Certain exclusions disregarded.--Net income shall be 
     determined without regard to--
       ``(A) sections 911, 931, and 933,
       ``(B) section 457, and
       ``(C) any exclusion from gross income for any elective 
     deferral (as defined in section 402(g)(3)).
       ``(3) Certain amounts included.--
       ``(A) Tax exempt interest.--Net income shall be increased 
     by the amount of interest received or accrued by the taxpayer 
     during the taxable year which is exempt from tax.
       ``(B) Nonqualified deferred compensation.--Deferred 
     compensation shall be included in gross income for the 1st 
     taxable year in which there is no substantial risk of 
     forfeiture of the rights to such compensation (within the 
     meaning of section 457(f)(3)). The preceding sentence shall 
     not apply to any plan or contract described in section 
     457(f)(2).
       ``(4) Estates and trusts.--The adjusted gross income of an 
     estate or trust shall be determined in accordance with 
     section 67(e).
       ``(d) Threshold Amount.--For purposes of this section--
       ``(1) In general.--The term `threshold amount' means--
       ``(A) except as provided in subparagraph (B), $75,000, and
       ``(B) zero in the case of a taxpayer who--
       ``(i) is married as of the close of the taxable year 
     (within the meaning of section 7703) but does not file a 
     joint return for such year, and
       ``(ii) does not live apart from his spouse at all times 
     during the taxable year.
       ``(2) Special rules for trusts.--
       ``(A) In general.--Except as otherwise provided in this 
     paragraph, the threshold amount for any trust shall be zero.
       ``(B) Exception for current distribution trusts.--
     Subparagraph (A) shall not apply to any trust to which 
     section 651 applies for the taxable year.
       ``(C) Beneficiary may allocate threshold.--Any beneficiary 
     of a trust to which subparagraph (A) applies may elect to 
     allocate any portion of such beneficiary's threshold amount 
     under paragraph (1) for any taxable year to such trust. Such 
     allocation shall apply for such trust's taxable year 
     beginning in the taxable year from which made and shall 
     reduce the threshold amount otherwise available to such 
     beneficiary.
       ``(d) Assessment Collected As Tax.--For purposes of 
     subtitle F, the assessment imposed by this section shall be 
     treated as if it were a tax imposed by chapter 1.

     ``SEC. 1612. INCLUSION OF UNDISTRIBUTED INCOME OF CERTAIN 
                   CORPORATIONS.

       ``(a) General Rule.--Each assessable person who owns 
     (within the meaning of section 542(a)) stock in a corporation 
     on the last day in the taxable year of such corporation on 
     which such corporation was an applicable corporation shall 
     include in gross income (for such person's taxable year in 
     which or with which such taxable year of the corporation 
     ends) as a dividend the amount such person would have 
     received as a dividend if on such last day such corporation 
     had distributed pro rata to its shareholders an amount which 
     bears the same ratio to the undistributed income of the 
     corporation for the taxable year as the portion of such 
     taxable year during which such corporation is an applicable 
     corporation bears to the entire taxable year.
       ``(b) Applicable Corporation.--For purposes of this 
     section--
       ``(1) In general.--The term `applicable corporation' 
     means--
       ``(A) any corporation engaged in a service-related business 
     in which a shareholder performs substantial services, and
       ``(B) any closely held C corporation.

     Such term shall not include any corporation exempt from 
     taxation under chapter 1.
       ``(2) Service-related business.--The term `service-related 
     business' means any trade or business described in 
     subparagraph (A) of section 1202(e)(3).
       ``(3) Closely held C corporation.--The term `closely held C 
     corporation' means any C corporation if, at any time during 
     the last half of the taxable year, more than 50 percent in 
     value of its outstanding stock is owned, directly or 
     indirectly through the application of section 544, by or for 
     not more than 10 individuals.
       ``(c) Undistributed Income.--For purposes of this section--
       ``(1) In general.--The term `undistributed income' means 
     the net income of the corporation for the taxable year 
     reduced any distributions by the corporation to its 
     shareholders with respect to its stock--
       ``(A) which are made during the taxable year and not taken 
     into account under subparagraph (B) for the preceding taxable 
     year, or
       ``(B) which--
       ``(i) are made after the close of the taxable year and on 
     or before the 45th day following the close of the taxable 
     year, and
       ``(ii) are designated, at such time and in such manner as 
     the Secretary may prescribe, as distributions for purposes of 
     this paragraph.

     Any distribution described in subparagraph (B) shall be 
     included in the gross income of

[[Page E1580]]

     the shareholder for the shareholder's taxable year which 
     includes the last day of the taxable year of the corporation 
     for which the reduction under this paragraph was made.
       ``(2) Net income.--Net income shall be determined in the 
     same way as taxable income under chapter 1 as in effect on 
     the day before the date of the enactment of this section.
       ``(d) Certain Rules To Apply.--Rules similar to the rules 
     of subsections (d) and (e) of section 551 shall apply with 
     respect to amounts required to be included in gross income 
     under this section.''
       (b) Clerical Amendment.--The table of chapters for subtitle 
     A is amended adding at the end the following new item:

``Chapter 7. Value added tax burden adjustments.''

       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1997.

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