[Congressional Record Volume 143, Number 45 (Wednesday, April 16, 1997)]
[Senate]
[Pages S3272-S3282]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. SPECTER:
  S. 593. A bill to amend the Internal Revenue Code of 1986 to impose a 
flat tax only on individual taxable earned income and business taxable 
income, and for other purposes; to the Committee on Finance.


                          FLAT TAX LEGISLATION

  Mr. SPECTER. Mr. President, I have sought recognition today to 
introduce the Flat Tax Act of 1997. This is legislation modeled after 
the legislation which I introduced in the 104th Congress, in March 
1995, which was the first Senate introduction of flat tax legislation.
  This bill is modeled after proposals by two distinguished professors 
of law from Stanford University, Professor Hall and Professor Rabushka. 
This bill would eliminate all deductions, like the Hall-Rabushka plan, 
with the modification in my legislation to allow deductions for 
interest on home interest mortgages up to borrowings of $100,000 and 
contributions to charity up to $2,500.
  The Hall-Rabushka plan would provide for a flat tax rate of 19 
percent to be revenue neutral. My proposal raises that rate by 1 
percent to 20 percent to allow for the deductions for home interest 
mortgages, which would cost $35 billion a year, and the charitable 
deduction, which would cost $13 billion a year.
  Mr. President, the advantages of the flat tax are very, very 
substantial.
  First, in the interest of simplicity, a tax return could be filled 
out on a simple postcard. And this is a tax return which I hold in my 
hand which could take 15 minutes to fill out. It requires simply that 
the taxpayer list the gross revenue, list his taxable income, carry 
forward the deductions for his family, any deductions on interest, any 
deduction on a home mortgage, the balance of the taxable items, 
multiplied by 20 percent.
  Taxpayers in the United States today, Mr. President, spend some 
5,400,000 hours at a cost of some $600 billion a year. The flat tax 
taxes income only once and thereby eliminates the tax on capital gains. 
It eliminates the tax on estates, eliminates the tax on dividends, all 
of which have already been taxed once.
  The flat tax is frequently challenged as being regressive, but the 
fact of the matter is that a taxpayer of a family of four would pay no 
taxes on the first $27,500 in income; and as it graduates up the scale, 
a taxpayer earning $35,000 would pay $1,219 less in tax than is paid 
under the current plan.
  It is frequently thought that the flat tax would be regressive and 
place a higher tax burden on lower income families, but that simply is 
not true. And the reason that we can have a win-win situation is 
because the flat tax provides for savings on compliance in the range of 
some $600 billion a year.
  This is a very progrowth proposition. And the economists have 
projected that over a 7-year period the gross national product could be 
increased by some $2 trillion. That is over $7,000 for every man, 
woman, and child in America.
  The great advantages of simplicity would especially be appreciated, 
Mr. President, on this particular day, April 16, because yesterday was 
the final day for filing the tax returns without any extension. And I 
have chosen the first day of the new tax period for symbolic reasons--
April 16--as a day to reintroduce the flat tax to try to give us some 
momentum because it is my firm view that if Americans really understood 
the import of the flat tax, its simplicity, its growth, and its 
savings, that it would be widely heralded.
  Mr. President as I stated, in the 104th Congress, I was the first 
Senator to introduce flat tax legislation and the first Member of 
Congress to set forth a deficit-neutral plan for dramatically reforming 
our Nation's Tax Code and replacing it with a flatter, fairer plan 
designed to stimulate economic growth. My flat tax legislation was also 
the first plan to retain limited deductions for home mortgage interest 
and charitable contributions.
  I testified with House Majority Leader Richard Armey before the 
Senate Finance and House Ways and Means Committees, as well as the 
Joint Economic Committee and the House Small Business Committee on the 
tremendous

[[Page S3273]]

benefits of flat tax reform. As I traveled around the country and held 
open-house town meetings across Pennsylvania and other States, the 
public support for fundamental tax reform was overwhelming. I would 
point out in those speeches that I never leave home without two key 
documents: My copy of the Constitution and my copy of my 10-line-flat-
tax postcard. I soon realized that I needed more than just one copy of 
my flat-tax postcard--many people wanted their own postcard so that 
they could see what life in a flat tax world would be like, where tax 
returns only take 15 minutes to fill out and individual taxpayers are 
no longer burdened with double taxation on their dividends, interest 
capital gains and estates.
  Support for the flat tax is growing as more and more Americans 
embrace the simplicity, fairness, and growth potential of flat tax 
reform. An April 17, 1995, edition of Newsweek cited a poll showing 
that 61 percent of Americans favor a flat tax over the current Tax 
Code. Significantly, a majority of the respondents who favor the flat 
tax preferred my plan for a flat tax with limited deductions for home 
mortgage interest and charitable contributions. Well before he entered 
the Republican Presidential primary, publisher Steve Forbes opined in a 
March 27, 1995, Forbes editorial about the tremendous appeal and 
potency of my flat tax plan.
  Congress was not immune to public demand for reform. Jack Kemp was 
appointed to head up the National Commission on Economic Growth and Tax 
Reform and the commission soon came out with its report recognizing the 
value of a fairer, flatter Tax Code. Mr. Forbes soon introduced a flat 
tax plan of his own, and my fellow candidates in the Republican 
Presidential primary began to embrace similar versions of either a flat 
tax or a consumption-based tax system.
  Unfortunately, the politics of the Presidential campaign denied the 
flat tax a fair hearing and momentum stalled. On October 27, 1995, I 
introduced a sense-of-the-Senate resolution calling on my colleagues to 
expedite congressional adoption of a flat tax. The resolution, which 
was introduced as an amendment to pending legislation, was not adopted.
  In this new period of opportunity as we commence the 105th session of 
Congress, I am optimistic that public support for flat tax reform will 
enable us to move forward and adopt this critically important and 
necessary legislation. That is why I am again introducing my Flat Tax 
Act of 1997, with some slight modifications to reflect inflation-
adjusted increases in the personal allowances and dependent allowances.
  My flat tax legislation will fundamentally revise the present Tax 
Code, with its myriad rates, deductions, and instructions. Instead, 
this legislation would institute a simple, flat 20 percent tax rate for 
all individuals and businesses. It will allow all taxpayers to file 
their April 15 tax returns on a simple 10-line postcard. This proposal 
is not cast in stone, but is intended to move the debate forward by 
focusing attention on three key principles which are critical to an 
effective and equitable taxation system: simplicity, fairness, and 
economic growth.
  Over the years and prior to my legislative efforts on behalf of flat 
tax reform, I have devoted considerable time and attention to analyzing 
our Nation's Tax Code and the policies which underlie it. I began this 
study of the complexities of the Tax Code 40 years ago as a law student 
at Yale University. I included some tax law as part of my practice in 
my early years as an attorney in Philadelphia. In the spring of 1962, I 
published a law review article in the Villanova Law Review, ``Pension 
and Profit Sharing Plans: Coverage and Operation for Closely Held 
Corporations and Professional Associations,'' 7 Villanova L. Rev. 335, 
which in part focused on the inequity in making tax-exempt retirement 
benefits available to some kinds of businesses but not others. It was 
apparent then, as it is now, that the very complexities of the Internal 
Revenue Code could be used to give unfair advantage to some; and made 
the already unpleasant obligation of paying taxes a real nightmare for 
many Americans.
  Well before I introduced my flat tax bill early in the 104th 
Congress, I had discussions with Congressman Richard Armey, now the 
House majority leader, about his flat tax proposal. Since then, and 
both before and after introducing my original flat tax bill, my staff 
and I have studied the flat tax at some length, and have engaged in a 
host of discussions with economists and tax experts, including the 
staff of the Joint Committee on Taxation, to evaluate the economic 
impact and viability of a flat tax.
  Based on those discussions, and on the revenue estimates supplied to 
us, I have concluded that a simple flat tax at a rate of 20 percent on 
all business and personal income can be enacted without reducing 
Federal revenues.
  The flat tax will help reduce the size of government and allow 
ordinary citizens to have more influence over how their money is spent 
because they will spend it--not the government. With a simple 20 
percent flat tax rate in effect, the average person can easily see the 
impact of any additional Federal spending proposal on his or her own 
paycheck. By creating strong incentives for savings and investment, the 
flat tax will have the beneficial result of making available larger 
pools of capital for expansion of the private sector of the economy--
rather than more tax money for big government. This will mean more jobs 
and, just as important, more higher paying jobs.
  As a matter of Federal tax policy, there has been considerable 
controversy over whether tax breaks should be used to stimulate 
particular kinds of economic activity, or whether tax policy should be 
neutral, leaving people to do what they consider best from a purely 
economic point of view. Our current Tax Code attempts to use tax policy 
to direct economic activity, but experience under that Code has 
demonstrated that so-called tax breaks are inevitably used as the basis 
for tax shelters which have no real relation to solid economic 
purposes, or to the activities which the tax laws were meant to 
promote. Even when the Government responds to particular tax shelters 
with new and often complex revisions of the regulations, clever tax 
experts are able to stay one or two steps ahead of the IRS bureaucrats 
by changing the structure of their business transactions and then 
claiming some legal distinctions between the taxpayer's new approach 
and the revised IRS regulations and precedents.

  Under the massive complexity of the current IRS Code, the battle 
between $500-an-hour tax lawyers and IRS bureaucrats to open and close 
loopholes is a battle the Government can never win. Under the flat tax 
bill I offer today, there are no loopholes, and tax avoidance through 
clever manipulations will become a thing of the past.
  The basic model for this legislation comes from a plan created by 
Profs. Robert Hall and Alvin Rabushka of the Hoover Institute at 
Stanford University. Their plan envisioned a flat tax with no 
deductions whatever. After considerable reflection, I decided to 
include limited deductions for home mortgage interest on up to $100,000 
in borrowing and charitable contributions up to $2,500 in the 
legislation. While these modifications undercut the pure principle of 
the flat tax, by continuing the use of tax policy to promote home 
buying and charitable contributions, I believe that those two 
deductions are so deeply ingrained in the financial planning of 
American families that they should be retained as a matter of fairness 
and public policy--and also political practicality. With those two 
deductions maintained, passage of a modified flat tax will be 
difficult; but without them, probably impossible.
  In my judgment, an indispensable prerequisite to enactment of a 
modified flat tax is revenue neutrality. Professor Hall advised that 
the revenue neutrality of the Hall-Rabushka proposal, which uses a 19-
percent rate, is based on a well documented model founded on reliable 
governmental statistics. My legislation raises that rate from 19- to 
20-percent to accommodate retaining limited home mortgage interest and 
charitable deductions. A preliminary estimate last Congress by the 
Committee on Joint Taxation places the annual cost of the home interest 
deduction at $35 billion, and the cost of the charitable deduction at 
$13 billion. While the revenue calculation is complicated because the 
Hall-Rabushka proposal encompasses significant revisions to business 
taxes as well as personal income taxes, there is a sound basis for 
concluding that the 1-

[[Page S3274]]

percent increase in rate would pay for the two deductions. Revenue 
estimates for Tax Code revisions are difficult to obtain and are, at 
best, judgment calls based on projections from fact situations with 
myriad assumed variables. It is possible that some modification may be 
needed at a later date to guarantee revenue neutrality.
  This legislation offered today is quite similar to the bill 
introduced in the House by Congressman Armey and in the Senate late in 
1995 by Senator Richard Shelby, which were both in turn modeled after 
the Hall-Rabushka proposal. The flat tax offers great potential for 
enormous economic growth, in keeping with principles articulated so 
well by Jack Kemp. This proposal taxes business revenues fully at their 
source, so that there is no personal taxation on interest, dividends, 
capital gains, gifts, or estates. Restructured in this way, the Tax 
Code can become a powerful incentive for savings and investment--which 
translates into economic growth and expansion, more and better jobs, 
and a rising standard of living for all Americans.
  In the 104th Congress, we took some important steps toward reducing 
the size and cost of Government, and this work is ongoing and vitally 
important. But the work of downsizing Government is only one side of 
the coin; what we must do at the same time, and with as much energy and 
care, is to grow the private sector. As we reform the welfare programs 
and Government bureaucracies of past administrations, we must replace 
those programs with a prosperity that extends to all segments of 
American society through private investment and job creation--which can 
have the additional benefit of producing even lower taxes for Americans 
as economic expansion adds to Federal revenues. Just as Americans need 
a Tax Code that is fair and simple, they also are entitled to tax laws 
designed to foster rather than retard economic growth. The bill I offer 
today embodies those principles.

  My plan, like the Armey-Shelby proposal, is based on the Hall-
Rabushka analysis. But my flat tax differs from the Armey-Shelby plan 
in four key respects: First, my bill contains a 20-percent flat tax 
rate. Second, this bill would retain modified deductions for mortgage 
interest and charitable contributions--which will require a 1-percent 
higher tax rate than otherwise. Third, my bill would maintain the 
automatic withholding of taxes from an individual's paycheck. Last, my 
bill is designed to be revenue neutral, and thus will not undermine our 
vital efforts to balance the Nation's budget. The estimate of revenue 
neutrality is based on the Hall-Rabushka analysis together with 
preliminary projections supplied by the Joint Committee on Taxation on 
the modifications proposed in this bill.
  The key advantages of this flat tax plan are threefold: First, it 
will dramatically simplify the payment of taxes. Second, it will remove 
much of the IRS regulatory morass now imposed on individual and 
corporate taxpayers, and allow those taxpayers to devote more of their 
energies to productive pursuits. Third, since it is a plan which 
rewards savings and investment, the flat tax will spur economic growth 
in all sectors of the economy as more money flows into investments and 
savings accounts, and as interest rates drop. By contrast, there will 
be a contraction of the IRS if this proposal is enacted.
  Under this tax plan, individuals would be taxed at a flat rate of 20 
percent on all income they earn from wages, pensions, and salaries. 
Individuals would not be taxed on any capital gains, interest on 
savings, or dividends--since those items will have already been taxed 
as part of the flat tax on business revenue. The flat tax will also 
eliminate all but two of the deductions and exemptions currently 
contained within the Tax Code. Instead, taxpayers will be entitled to 
personal allowances for themselves and their children. These personal 
allowances have been adjusted upward to reflect inflation increases for 
1995 and 1996. Thus, the new personal allowances are: $10,000 for a 
single taxpayer; $15,000 for a single head of household; $17,500 for a 
married couple filing jointly; and $5,000 per child or dependent. These 
personal allowances would be adjusted annually for inflation commencing 
in 1997.
  In order to ensure that this flat tax does not unfairly impact low-
income families, the personal allowances contained in my proposal are 
much higher than the standard deduction and personal exemptions allowed 
under the current Tax Code. For example, in 1996, the standard 
deduction is $4,000 for a single taxpayer, $5,900 for a head of 
household, and $6,700 for a married couple filing jointly, while the 
personal exemption for individuals and dependents is $2,550. Thus, 
under the current Tax Code, a family of four which does not itemize 
deductions would pay tax on all income over $16,900--personal 
exemptions of $10,400 and a standard deduction of $6,700. By contrast, 
under my flat tax bill, that same family would receive a personal 
exemption of $27,500, and would pay tax only on income over that 
amount.
  My legislation retains the provisions for the deductibility of 
charitable contributions up to a limit of $2,500 and home mortgage 
interest on up to $100,000 of borrowing. Retention of these key 
deductions will, I believe, enhance the political salability of this 
legislation and allow the debate on the flat tax to move forward. If a 
decision is made to eliminate these deductions, the revenue saved could 
be used to reduce the overall flat tax rate below 20 percent.
  With respect to businesses, the flat tax would also be a flat rate of 
20 percent. My legislation would eliminate the intricate scheme of 
complicated depreciation schedules, deductions, credits, and other 
complexities that go into business taxation in favor of a much-
simplified system that taxes all business revenue less only wages, 
direct expenses, and purchases--a system with much less potential for 
fraud, ``creative accounting,'' and tax avoidance.
  Businesses would be allowed to expense 100 percent of the cost of 
capital formation, including purchases of capital equipment, 
structures, and land, and to do so in the year in which the investments 
are made. The business tax would apply to all money not reinvested in 
the company in the form of employment or capital formation--thus fully 
taxing revenue at the business level and making it inappropriate to 
retax the same moneys when passed on to investors as dividends or 
capital gains.
  Let me now turn to a more specific discussion of the advantages of 
the flat tax legislation I am reintroducing today.


                               Simplicity

  The first major advantage to this flat tax is simplicity. According 
to the Tax Foundation, Americans spend approximately 5.3 billion hours 
each year filling out tax forms. Much of this time is spent burrowing 
through IRS laws and regulations which fill 12,000 pages and which, 
according to the Tax Foundation, have grown from 744,000 words in 1955 
to 5.6 million words in 1994. The Internal Revenue Code annotations 
alone fill 21 volumes of mind-numbing detail and minutiae.
  Whenever the Government gets involved in any aspect of our lives, it 
can convert the most simple goal or task into a tangled array of 
complexity, frustration, and inefficiency. By way of example, most 
Americans have become familiar with the absurdities of the Government's 
military procurement programs. If these programs have taught us 
anything, it is how a simple purchase order for a hammer or a toilet 
seat can mushroom into thousands of words of regulations and 
restrictions when the Government gets involved. The Internal Revenue 
Service is certainly no exception. Indeed, it has become a 
distressingly common experience for taxpayers to receive computerized 
printouts claiming that additional taxes are due, which require 
repeated exchanges of correspondence or personal visits before it is 
determined, as it so often is, that the taxpayer was right in the first 
place.
  The plan offered today would eliminate these kinds of frustrations 
for millions of taxpayers. This flat tax would enable us to scrap the 
great majority of the IRS rules, regulations, instructions, and delete 
literally millions of words from the Internal Revenue Code. Instead of 
tens of millions of hours of nonproductive time spent in compliance 
with--or avoidance of--the Tax Code, taxpayers would spend only the 
small amount of time necessary to fill out a postcard-sized form. Both 
business and individual taxpayers would thus find valuable hours freed 
up

[[Page S3275]]

to engage in productive business activity, or for more time with their 
families, instead of poring over tax tables, schedules, and 
regulations.
  The flat tax I have proposed can be calculated just by filling out a 
small postcard which would require a taxpayer only to answer a few easy 
questions. The postcard would look like this:


              form 1       Individual Wage Tax       1997

       Your first name and initial (if joint return, also give 
     spouse's name and initial).
       Your social security number.
       Home address (number and street including apartment number 
     or rural route).
       Spouse's social security number.
       City, town, or post office, state, and ZIP code.
       1. Wages, salary, pension and retirement benefits.
       2. Personal allowance (enter only one):
         --$17,500 for married filing jointly;
         --$10,000 for single;
         --$15,000 for single head of household.
       3. Number of dependents, not including spouse, multiplied 
     by $5,000.
       4. Mortgage interest on debt up to $100,000 for owner-
     occupied home.
       5. Cash or equivalent charitable contributions (up to 
     $2,500).
       6. Total allowances and deductions (lines 2, 3, 4 and 5).
       7. Taxable compensation (line 1 less line 6, if positive; 
     otherwise zero).
       8. Tax (20% of line 7).
       9. Tax withheld by employer.
       10. Tax or refund due (difference between lines 8 and 9).

  Filing a tax return would become a manageable chore, not a seemingly 
endless nightmare, for most taxpayers.


                        Cutting Back Government

  Along with the advantage of simplicity, enactment of this flat tax 
bill will help to remove the burden of costly and unnecessary 
Government regulation, bureaucracy and redtape from our everyday lives. 
The heavy hand of Government bureaucracy is particularly onerous in the 
case of the Internal Revenue Service, which has been able to extend its 
influence into so many aspects of our lives.
  In 1995, the IRS employed 117,000 people, spread out over countless 
offices across the United States. Its budget was in excess of $7 
billion, with over $4 billion spent merely on enforcement. By 
simplifying the tax code and eliminating most of the IRS' vast array of 
rules and regulations, the flat tax would enable us to cut a 
significant portion of the IRS budget, including the bulk of the 
funding now needed for enforcement and administration.
  In addition, a flat tax would allow taxpayers to redirect their time, 
energies and money away from the yearly morass of tax compliance. 
According to the Tax Foundation, in 1996, businesses will spend over 
$150 billion complying with the Federal tax laws, and individuals will 
spend an additional $74 billion, for a total of nearly $225 billion. 
Fortune magazine estimates a much higher cost of compliance--nearly 
$600 billion per year. According to a Tax Foundation study, adoption of 
flat tax reform would cut pre-filing compliance costs by over 90 
percent.
  Monies spent by businesses and investors in creating tax shelters and 
finding loopholes could be instead directed to productive and job-
creating economic activity. With the adoption of a flat tax, the 
opportunities for fraud and cheating would also be vastly reduced, 
allowing the government to collect, according to some estimates, over 
$120 billion annually.


                            Economic Growth

  The third major advantage to a flat tax is that it will be a 
tremendous spur to economic growth. Harvard economist Dale Jorgenson 
estimates adoption of a flat tax like the one offered today would 
increase future national wealth by over $2 trillion, in present value 
terms, over a 7-year period. This translates into over $7,500 in 
increased wealth for every man, woman and child in America. This growth 
also means that there will be more jobs--it is estimated that the $2 
trillion increase in wealth would lead to the creation of 6 million new 
jobs.

  The economic principles are fairly straightforward. Our current tax 
system is inefficient; it is biased toward too little savings and too 
much consumption. The flat tax creates substantial incentives for 
savings and investment by eliminating taxation on interest, dividends 
and capital gains--and tax policies which promote capital formation and 
investment are the best vehicle for creation of new and high paying 
jobs, and for a greater prosperity for all Americans.
  It is well recognized that to promote future economic growth, we need 
not only to eliminate the Federal Government's reliance on deficits and 
borrowed money, but to restore and expand the base of private savings 
and investment that has been the real engine driving American 
prosperity throughout our history. These concepts are interrelated, for 
the Federal budget deficit soaks up much of what we have saved, leaving 
less for businesses to borrow for investments.
  It is the sum total of savings by all aspects of the U.S. economy 
that represents the pool of all capital available for investment--in 
training, education, research, machinery, physical plant, et cetera--
and that constitutes the real seed of future prosperity. The statistics 
here are daunting. In the 1960's, the net U.S. national savings rate 
was 8.2 percent, but it has fallen to a dismal 1.5 percent. In recent 
international comparisons, the United States has the lowest savings 
rate of any of the G-7 countries. We save at only one-tenth the rate of 
the Japanese, and only one-fifth the rate of the Germans. This is 
unacceptable and we must do something to reverse the trend.
  An analysis of the components of U.S. savings patterns shows that 
although the Federal budget deficit is the largest cause of dissavings, 
both personal and business savings rates have declined significantly 
over the past three decades. Thus, to recreate the pool of capital 
stock that is critical to future U.S. growth and prosperity, we have to 
do more than just get rid of the deficit. We have to very materially 
raise our levels of private savings and investment. And we have to do 
so in a way that will not cause additional deficits.
  The less money people save, the less money is available for business 
investment and growth. The current tax system discourages savings and 
investment, because it taxes the interest we earn from our savings 
accounts, the dividends we make from investing in the stock market, and 
the capital gains we make from successful investments in our homes and 
the financial markets. Indeed, under the current law these rewards for 
saving and investment are not only taxed, they are overtaxed--since 
gains due solely to inflation, which represent no real increase in 
value, are taxed as if they were profits to the taxpayer.
  With the limited exceptions of retirement plans and tax-free 
municipal bonds, our current tax code does virtually nothing to 
encourage personal savings and investment, or to reward it over 
consumption. This bill will change this system, and address this 
problem. The proposed legislation reverses the current skewed 
incentives by promoting savings and investment by individuals and by 
businesses. Individuals would be able to invest and save their money 
tax free and reap the benefits of the accumulated value of those 
investments without paying a capital gains tax upon the sale of these 
investments. Businesses would also invest more as the flat tax allowed 
them to expense fully all sums invested in new equipment and technology 
in the year the expense was incurred, rather than dragging out the tax 
benefits for these investments through complicated depreciation 
schedules. With greater investment and a larger pool of 
savings available, interest rates and the costs of investment would 
also drop, spurring even greater economic growth.

  Critics of the flat tax have argued that we cannot afford the revenue 
losses associated with the tremendous savings and investment incentives 
the bill affords to businesses and individuals. Those critics are 
wrong. Not only is this bill carefully crafted to be revenue neutral, 
but historically we have seen that when taxes are cut, revenues 
actually increase, as more taxpayers work harder for a larger share of 
their take-home pay, and investors are more willing to take risks in 
pursuit of rewards that will not get eaten up in taxes.
  As one example, under President Kennedy when individual tax rates 
were lowered, investment incentives including the investment tax credit 
were created and then expanded and depreciation rates were accelerated. 
Yet, between 1962 and 1967, gross annual Federal tax receipts grew from 
$99.7 billion to $148 billion--an increase of nearly 50 percent. More 
recently after President Reagan's tax cuts in the

[[Page S3276]]

early 1980's, Government tax revenues rose from just under $600 billion 
in 1981 to nearly $1 trillion in 1989. In fact, the Reagan tax cut 
program helped to bring about one of the longest peacetime expansions 
of the U.S. economy in history. There is every reason to believe that 
the flat tax proposed here can do the same--and by maintaining revenue 
neutrality in this flat tax proposal, as we have, we can avoid any 
increases in annual deficits and the national debt.
  In addition to increasing Federal revenues by fostering economic 
growth, the flat tax can also add to Federal revenues without 
increasing taxes by closing tax loopholes. The Congressional Research 
Service estimates that for fiscal year 1995, individuals sheltered more 
than $393 billion in tax revenue in legal loopholes, and corporations 
sheltered an additional $60 billion. There may well be additional money 
hidden in quasi-legal or even illegal tax shelters. Under a flat tax 
system, all tax shelters will disappear and all income will be subject 
to taxation.
  The larger pool of savings created by a flat tax will also help to 
reduce our dependence on foreign investors to finance both our Federal 
budget deficits and our private sector economic activity. Currently, of 
the publicly held Federal debt--that is, the portion not held by 
various Federal trust funds like Social Security--nearly 20 percent is 
held by foreigners--the highest level in our history. By contrast, in 
1965 less than 5 percent of publicly held national debt was foreign 
owned. We are paying over $40 billion in annual interest to foreign 
governments and individuals, and this by itself accounts for roughly 
one-third of our whole international balance of payments deficit. These 
massive interest payments are one of the principal sources of American 
capital flowing abroad, a factor which then enables foreign investors 
to buy up American businesses. During the period 1980-91, the gross 
value of U.S. assets owned by foreign businesses and individuals rose 
427 percent, from $543 billion to $2.3 trillion.
  The substantial level of foreign ownership of our national debt 
creates both political and economic problems. On the political level, 
there is at least the potential that some foreign nation may assume a 
position where its level of investment in U.S. debt gives it 
disproportionate leverage over American policy. Economically, 
increasing foreign investment in Treasury debt furthers our national 
shift from a creditor to a debtor nation, weakening the dollar and 
undercutting our international trade position. A recent Congressional 
Research Service report put it succinctly: ``To pay for today's capital 
inflows, tomorrow's economy will have to ship more abroad in exchange 
for fewer foreign products. These payments will be a consequence in 
part of heavy Federal borrowing since 1982.'' With a flat tax in place, 
America's own supply of capital can be replenished, and we can return 
to our historic position as an international creditor nation rather 
than a debtor.

  The growth case for a flat tax is compelling. It is even more 
compelling in the case of a tax revision that is simple and 
demonstrably fair.


                                Fairness

  By substantially increasing the personal allowances for taxpayers and 
their dependents, this flat tax proposal ensures that poorer taxpayers 
will pay no tax and that taxes will not be regressive for lower and 
middle income taxpayers. At the same time, by closing the hundreds of 
tax loopholes which are currently used by wealthier taxpayers to 
shelter their income and avoid taxes, this flat tax bill will also 
ensure that all Americans pay their fair share.
  A variety of specific cases illustrate the fairness and simplicity of 
this flat tax:


Case No. 1--Married couple with two children, rents home, yearly income 
                                $35,000

Under Current Law:
  Income........................................................$35,000
  Four personal exemptions......................................$10,200
  Standard deduction..............................................6,700
  Taxable income................................................$18,100
  Tax due under current rates....................................$2,719
  Marginal rate (percent)..........................................15.0
  Effective tax rate (percent)......................................7.8
Under Flat Tax:
  Personal allowance............................................$17,500
  Two dependents................................................$10,000
  Taxable income.................................................$7,500
  Tax due under flat tax.........................................$1,500
  Effective tax rate (percent)......................................4.3

Savings of $1,219


    Case No. 2--Single individual, rents home, yearly income $50,000

Under Current Law:
  Income........................................................$50,000
  One personal exemption.........................................$2,550
  Standard deduction.............................................$4,000
  Taxable income................................................$43,450
  Tax due under current rates....................................$9,053
  Marginal rate (percent)..........................................28.0
  Effective rate (percent).........................................18.1
Under Flat Tax:
  Personal allowance............................................$10,000
  Taxable income................................................$40,000
  Tax due under flat tax.........................................$8,000
  Effective rate (percent).........................................16.0

Savings of $1,053

 Case No. 3--Married couple with no children, $150,000 mortgage at 9%, 
                         yearly income $75,000

Under Current Law:
  Income........................................................$75,000
  Two personal exemptions........................................$5,100
  Home mortgage deduction.......................................$13,500
  State and local taxes..........................................$3,000
  Charitable deduction...........................................$1,500
  Taxable income................................................$51,900
  Tax due under current rates....................................$9,326
  Marginal rate (percent)........................................... 28
  Effective tax rate (percent).....................................12.4
Under Flat Tax:
  Personal allowance............................................$17,500
  Home mortgage deduction........................................$9,000
  Charitable deduction...........................................$1,500
  Taxable income................................................$47,000
  Tax due under flat tax.........................................$9,400
  Effective tax rate (percent).....................................12.5

Slight Increase of $74


 Case No. 4--Married couple with three children, $250,000 mortgage at 
                       9%, yearly income $125,000

Under Current Law:
  Income.......................................................$125,000
  Five personal exemptions......................................$12,750
  Home mortgage deduction.......................................$22,500
  State and local taxes..........................................$5,000
  Retirement fund deductions.....................................$6,000
  Charitable deductions..........................................$2,500
  Taxable income................................................$76,250
  Tax due under current rates...................................$16,130
  Marginal rate (percent)........................................... 31
  Effective tax rate (percent).....................................12.9
Under Flat Tax:
  Personal allowance............................................$17,500
  Three dependents..............................................$15,000
  Home mortgage deduction........................................$9,000
  Charitable deduction...........................................$2,500
  Taxable income................................................$81,000
  Tax due under flat tax........................................$16,200
  Effective tax rate (percent)...................................... 13

Slight Increase of $70


Case No. 5--Married couple, no children, $1,000,000 mortgages at 9% on 
                        2 homes, $500,000 income

Under Current Law:
  Income.......................................................$500,000
  Personal exemptions at this level................................. $0
  Home mortgage deductions......................................$90,000
  State and local taxes.........................................$40,000
  Retirement deductions.........................................$50,000
  Charitable deductions.........................................$30,000
  Taxable income...............................................$290,000
  Tax due under current rates...................................$91,949
  Marginal rate (percent)..........................................39.6
  Effective tax rate (percent).....................................18.4
Under Flat Tax:
  Personal allowance............................................$17,500
  Mortgage deduction.............................................$9,000
  Charitable deduction...........................................$2,500
  Taxable income...............................................$471,000
  Tax due under flat tax........................................$94,200
  Effective tax rate (percent).....................................18.8

$2,251 higher taxes
  The flat tax legislation that I am offering will retain the element 
of progressivity that Americans view as essential to fairness in an 
income tax system. Because of the lower end income exclusions, and the 
capped deductions for home mortgage interest and charitable 
contributions, the effective tax rates under my bill will range from 0 
percent for families with incomes under about $30,000 to roughly 20 
percent for the highest income groups:

                               ANNUAL TAXES UNDER 20 PERCENT FLAT TAX FOR MARRIED COUPLE WITH TWO CHILDREN FILING JOINTLY                               
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                          Personal                        Marginal tax                  
              Income                Home mortgage   Deductible mtg.     Charitable     allowance (w/    Taxable income      rate (in        Taxes owed  
                                         \1\            interest       contribution      children)                          percent)                    
---------------------------------------------------------------------------\1\--------------------------------------------------------------------------
<27,500..........................  ...............  ...............  ...............  ...............                0                0                0
30,000...........................           60,000            5,400              600           27,500                0                0                0
40,000...........................           80,000            7,200              800           27,500            4,500              2.3              900

[[Page S3277]]

                                                                                                                                                        
50,000...........................          100,000            9,000            1,000           27,500           12,500              5.0            2,500
60,000...........................          120,000            9,000            1,200           27,500           22,300              7.4            4,460
70,000...........................          140,000            9,000            1,400           27,500           32,100              9.2            6,420
80,000...........................          160,000            9,000            1,600           27,500           41,900             10.5            8,380
90,000...........................          180,000            9,000            1,800           27,500           51,700             11.5           10,340
100,000..........................          200,000            9,000            2,000           27,500           61,500             12.3           12,300
125,000..........................          250,000            9,000            2,500           27,500           86,000             13.8           17,200
150,000..........................          300,000            9,000            2,500           27,500          111,000             14.8           22,200
200,000..........................          400,000            9,000            2,500           27,500          161,000             16.1           32,200
250,000..........................          500,000            9,000            2,500           27,500          211,000             16.8           42,200
500,000..........................        1,000,000            9,000            2,500           27,500          461,000             18.4           92,200
1,000,000........................        2,000,000            9,000            2,500           27,500          961,000             19.2          192,200
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Assumes home mortgage of twice annual income at a rate of 9 percent and charitable contributions up to 2 percent of annual income.                  

  My proposed legislation demonstrably retains the fairness that must 
be an essential component of the American tax system.


                               Conclusion

  The proposal that I make today is dramatic, but so are its 
advantages: a taxation system that is simple, fair, and designed to 
maximize prosperity for all Americans. A summary of the key advantages 
are:
  Simplicity: A 10-line postcard filing would replace the myriad forms 
and attachments currently required, thus saving Americans up to 5.3 
billion hours they currently spend every year in tax compliance.
  Cuts Government: The flat tax would eliminate the lion's share of IRS 
rules, regulations, and requirements, which have grown from 744,000 
words in 1955 to 5.6 million words and 12,000 pages currently. It would 
also allow us to slash the mammoth IRS bureaucracy of 117,000 
employees.
  Promotes economic growth: Economists estimate a growth of over $2 
trillion in national wealth over 7 years, representing an increase of 
approximately $7,500 in personal wealth for every man, woman, and child 
in America. This growth would also lead to the creation of 6 million 
new jobs.
  Increases efficiency: Investment decisions would be made on the basis 
of productivity rather than simply for tax avoidance, thus leading to 
even greater economic expansion.
  Reduces interest rates: Economic forecasts indicate that interest 
rates would fall substantially, by as much as two points, as the flat 
tax removes many of the current disincentives to savings.
  Lowers compliance costs: Americans would be able to save up to $224 
billion they currently spend every year in tax compliance.
  Decreases fraud: As tax loopholes are eliminated and the Tax Code is 
simplified, there will be far less opportunity for tax avoidance and 
fraud, which now amounts to over $120 billion in uncollected revenue 
annually.
  Reduces IRS costs: Simplification of the Tax Code will allow us to 
save significantly on the $7 billion annual budget currently allocated 
to the Internal Revenue Service.
  Professors Hall and Rabushka have projected that within 7 years of 
enactment, this type of a flat tax would produce a 6-percent increase 
in output from increased total work in the U.S. economy and increased 
capital formation. The economic growth would mean a $7,500 increase in 
the personal income of all Americans.
  No one likes to pay taxes. But Americans will be much more willing to 
pay their taxes under a system that they believe is fair, a system that 
they can understand, and a system that they recognize promotes rather 
than prevents growth and prosperity. The legislation I introduce today 
will afford Americans such a tax system.
  Mr. President, I ask unanimous consent that the text of the bill be 
printed in the Record.
  The PRESIDING OFFICER. Without objection, it is so ordered.

                                 S. 593

       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; AMENDMENT OF 1986 
                   CODE.

       (a) Short Title.--This Act may be cited as the ``Flat Tax 
     Act of 1997''.
       (b) Table of Contents.--The table of contents for this Act 
     is as follows:

Sec. 1. Short title; table of contents; amendment of 1986 Code.
Sec. 2. Flat tax on individual taxable earned income and business 
              taxable income.
Sec. 3. Repeal of estate and gift taxes.
Sec. 4. Additional repeals.
Sec. 5. Effective dates.
       (c) 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.

     SEC. 2. FLAT TAX ON INDIVIDUAL TAXABLE EARNED INCOME AND 
                   BUSINESS TAXABLE INCOME.

       (a) In General.--Subchapter A of chapter 1 of subtitle A is 
     amended to read as follows:

             ``Subchapter A--Determination of Tax Liability

``Part I.   Tax on individuals.
``Part II.  Tax on business activities.

                      ``PART I--TAX ON INDIVIDUALS

``Sec. 1. Tax imposed.
``Sec. 2. Standard deduction.
``Sec. 3. Deduction for cash charitable contributions.
``Sec. 4. Deduction for home acquisition indebtedness.
``Sec. 5. Definitions and special rules.

     ``SECTION 1. TAX IMPOSED.

       ``(a) Imposition of Tax.--There is hereby imposed on every 
     individual a tax equal to 20 percent of the taxable earned 
     income of such individual.
       ``(b) Taxable Earned Income.--For purposes of this section, 
     the term `taxable earned income' means the excess (if any) 
     of--
       ``(1) the earned income received or accrued during the 
     taxable year, over
       ``(2) the sum of--
       ``(A) the standard deduction,
       ``(B) the deduction for cash charitable contributions, and
       ``(C) the deduction for home acquisition indebtedness,
     for such taxable year.
       ``(c) Earned Income.--For purposes of this section--
       ``(1) In general.--The term `earned income' means wages, 
     salaries, or professional fees, and other amounts received 
     from sources within the United States as compensation for 
     personal services actually rendered, but does not include 
     that part of compensation derived by the taxpayer for 
     personal services rendered by the taxpayer to a corporation 
     which represents a distribution of earnings or profits rather 
     than a reasonable allowance as compensation for the personal 
     services actually rendered.
       ``(2) Taxpayer engaged in trade or business.--In the case 
     of a taxpayer engaged in a trade or business in which both 
     personal services and capital are material income-producing 
     factors, under regulations prescribed by the Secretary, a 
     reasonable allowance as compensation for the personal 
     services rendered by the taxpayer, not in excess of 30 
     percent of the taxpayer's share of the net profits of such 
     trade or business, shall be considered as earned income.

     ``SEC. 2. STANDARD DEDUCTION.

       ``(a) In General.--For purposes of this subtitle, the term 
     `standard deduction' means the sum of--
       ``(1) the basic standard deduction, plus
       ``(2) the additional standard deduction.
       ``(b) Basic Standard Deduction.--For purposes of subsection 
     (a), the basic standard deduction is--
       ``(1) $17,500 in the case of--
       ``(A) a joint return, and
       ``(B) a surviving spouse (as defined in section 5(a)),
       ``(2) $15,000 in the case of a head of household (as 
     defined in section 5(b)), and
       ``(3) $10,000 in the case of an individual--
       ``(A) who is not married and who is not a surviving spouse 
     or head of household, or
       ``(B) who is a married individual filing a separate return.
       ``(c) Additional Standard Deduction.--For purposes of 
     subsection (a), the additional standard deduction is $5,000 
     for each dependent (as defined in section 5(d))--
       ``(1) whose earned income for the calendar year in which 
     the taxable year of the taxpayer begins is less than the 
     basic standard deduction specified in subsection (b)(3), or
       ``(2) who is a child of the taxpayer and who--

[[Page S3278]]

       ``(A) has not attained the age of 19 at the close of the 
     calendar year in which the taxable year of the taxpayer 
     begins, or
       ``(B) is a student who has not attained the age of 24 at 
     the close of such calendar year.
       ``(d) Inflation Adjustment.--
       ``(1) In general.--In the case of any taxable year 
     beginning in a calendar year after 1997, each dollar amount 
     contained in subsections (b) and (c) shall be increased by an 
     amount equal to--
       ``(A) such dollar amount, multiplied by
       ``(B) the cost-of-living adjustment under section 1(f)(3) 
     for the calendar year in which the taxable year begins, 
     determined by substituting `calendar year 1996' for `calendar 
     year 1992' in subparagraph (B) of such section.
       ``(2) Rounding.--If any increase determined under paragraph 
     (1) is not a multiple of $50, such amount shall be rounded to 
     the next lowest multiple of $50.

     ``SEC. 3. DEDUCTION FOR CASH CHARITABLE CONTRIBUTIONS.

       ``(a) General Rule.--For purposes of this part, there shall 
     be allowed as a deduction any charitable contribution (as 
     defined in subsection (b)) not to exceed $2,500 ($1,250, in 
     the case of a married individual filing a separate return), 
     payment of which is made within the taxable year.
       ``(b) Charitable Contribution Defined.--For purposes of 
     this section , the term `charitable contribution' means a 
     contribution or gift of cash or its equivalent to or for the 
     use of the following:
       ``(1) A State, a possession of the United States, or any 
     political subdivision of any of the foregoing, or the United 
     States or the District of Columbia, but only if the 
     contribution or gift is made for exclusively public purposes.
       ``(2) A corporation, trust, or community chest, fund, or 
     foundation--
       ``(A) created or organized in the United States or in any 
     possession thereof, or under the law of the United States, 
     any State, the District of Columbia, or any possession of the 
     United States;
       ``(B) organized and operated exclusively for religious, 
     charitable, scientific, literary, or educational purposes, or 
     to foster national or international amateur sports 
     competition (but only if no part of its activities involve 
     the provision of athletic facilities or equipment), or for 
     the prevention of cruelty to children or animals;
       ``(C) no part of the net earnings of which inures to the 
     benefit of any private shareholder or individual; and
       ``(D) which is not disqualified for tax exemption under 
     section 501(c)(3) by reason of attempting to influence 
     legislation, and which does not participate in, or intervene 
     in (including the publishing or distributing of statements), 
     any political campaign on behalf of (or in opposition to) any 
     candidate for public office.

     A contribution or gift by a corporation to a trust, chest, 
     fund, or foundation shall be deductible by reason of this 
     paragraph only if it is to be used within the United States 
     or any of its possessions exclusively for purposes specified 
     in subparagraph (B). Rules similar to the rules of section 
     501(j) shall apply for purposes of this paragraph.
       ``(3) A post or organization of war veterans, or an 
     auxiliary unit or society of, or trust or foundation for, any 
     such post or organization--
       ``(A) organized in the United States or any of its 
     possessions, and
       ``(B) no part of the net earnings of which inures to the 
     benefit of any private shareholder or individual.
       ``(4) In the case of a contribution or gift by an 
     individual, a domestic fraternal society, order, or 
     association, operating under the lodge system, but only if 
     such contribution or gift is to be used exclusively for 
     religious, charitable, scientific, literary, or educational 
     purposes, or for the prevention of cruelty to children or 
     animals.
       ``(5) A cemetery company owned and operated exclusively for 
     the benefit of its members, or any corporation chartered 
     solely for burial purposes as a cemetery corporation and not 
     permitted by its charter to engage in any business not 
     necessarily incident to that purpose, if such company or 
     corporation is not operated for profit and no part of the net 
     earnings of such company or corporation inures to the benefit 
     of any private shareholder or individual.

     For purposes of this section, the term `charitable 
     contribution' also means an amount treated under subsection 
     (d) as paid for the use of an organization described in 
     paragraph (2), (3), or (4).
       ``(c) Disallowance of Deduction in Certain Cases and 
     Special Rules.--
       ``(1) Substantiation requirement for certain 
     contributions.--
       ``(A) General rule.--No deduction shall be allowed under 
     subsection (a) for any contribution of $250 or more unless 
     the taxpayer substantiates the contribution by a 
     contemporaneous written acknowledgment of the contribution by 
     the donee organization that meets the requirements of 
     subparagraph (B).
       ``(B) Content of acknowledgment.--An acknowledgment meets 
     the requirements of this subparagraph if it includes the 
     following information:
       ``(i) The amount of cash contributed.
       ``(ii) Whether the donee organization provided any goods or 
     services in consideration, in whole or in part, for any 
     contribution described in clause (i).
       ``(iii) A description and good faith estimate of the value 
     of any goods or services referred to in clause (ii) or, if 
     such goods or services consist solely of intangible religious 
     benefits, a statement to that effect.

     For purposes of this subparagraph, the term `intangible 
     religious benefit' means any intangible religious benefit 
     which is provided by an organization organized exclusively 
     for religious purposes and which generally is not sold in a 
     commercial transaction outside the donative context.
       ``(C) Contemporaneous.--For purposes of subparagraph (A), 
     an acknowledgment shall be considered to be contemporaneous 
     if the taxpayer obtains the acknowledgment on or before the 
     earlier of--
       ``(i) the date on which the taxpayer files a return for the 
     taxable year in which the contribution was made, or
       ``(ii) the due date (including extensions) for filing such 
     return.
       ``(D) Substantiation not required for contributions 
     reported by the donee organization.--Subparagraph (A) shall 
     not apply to a contribution if the donee organization files a 
     return, on such form and in accordance with such regulations 
     as the Secretary may prescribe, which includes the 
     information described in subparagraph (B) with respect to the 
     contribution.
       ``(E) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the purposes of this paragraph, including regulations that 
     may provide that some or all of the requirements of this 
     paragraph do not apply in appropriate cases.
       ``(2) Denial of deduction where contribution for lobbying 
     activities.--No deduction shall be allowed under this section 
     for a contribution to an organization which conducts 
     activities to which section 11(d)(2)(C)(i) applies on matters 
     of direct financial interest to the donor's trade or 
     business, if a principal purpose of the contribution was to 
     avoid Federal income tax by securing a deduction for such 
     activities under this section which would be disallowed by 
     reason of section 11(d)(2)(C) if the donor had conducted such 
     activities directly. No deduction shall be allowed under 
     section 11(d) for any amount for which a deduction is 
     disallowed under the preceding sentence.
       ``(d) Amounts Paid To Maintain Certain Students as Members 
     of Taxpayer's Household.--
       ``(1) In general.--Subject to the limitations provided by 
     paragraph (2), amounts paid by the taxpayer to maintain an 
     individual (other than a dependent, as defined in section 
     5(d), or a relative of the taxpayer) as a member of such 
     taxpayer's household during the period that such individual 
     is--
       ``(A) a member of the taxpayer's household under a written 
     agreement between the taxpayer and an organization described 
     in paragraph (2), (3), or (4) of subsection (b) to implement 
     a program of the organization to provide educational 
     opportunities for pupils or students in private homes, and
       ``(B) a full-time pupil or student in the twelfth or any 
     lower grade at an educational organization located in the 
     United States which normally maintains a regular faculty and 
     curriculum and normally has a regularly enrolled body of 
     pupils or students in attendance at the place where its 
     educational activities are regularly carried on,

     shall be treated as amounts paid for the use of the 
     organization.
       ``(2) Limitations.--
       ``(A) Amount.--Paragraph (1) shall apply to amounts paid 
     within the taxable year only to the extent that such amounts 
     do not exceed $50 multiplied by the number of full calendar 
     months during the taxable year which fall within the period 
     described in paragraph (1). For purposes of the preceding 
     sentence, if 15 or more days of a calendar month fall within 
     such period such month shall be considered as a full calendar 
     month.
       ``(B) Compensation or reimbursement.--Paragraph (1) shall 
     not apply to any amount paid by the taxpayer within the 
     taxable year if the taxpayer receives any money or other 
     property as compensation or reimbursement for maintaining the 
     individual in the taxpayer's household during the period 
     described in paragraph (1).
       ``(3) Relative defined.--For purposes of paragraph (1), the 
     term `relative of the taxpayer' means an individual who, with 
     respect to the taxpayer, bears any of the relationships 
     described in subparagraphs (A) through (H) of section 
     5(d)(1).
       ``(4) No other amount allowed as deduction.--No deduction 
     shall be allowed under subsection (a) for any amount paid by 
     a taxpayer to maintain an individual as a member of the 
     taxpayer's household under a program described in paragraph 
     (1)(A) except as provided in this subsection.
       ``(e) Denial of Deduction for Certain Travel Expenses.--No 
     deduction shall be allowed under this section for traveling 
     expenses (including amounts expended for meals and lodging) 
     while away from home, whether paid directly or by 
     reimbursement, unless there is no significant element of 
     personal pleasure, recreation, or vacation in such travel.
       ``(f) Disallowance of Deductions in Certain Cases.--For 
     disallowance of deductions for contributions to or for the 
     use of Communist controlled organizations, see section 11(a) 
     of the Internal Security Act of 1950 (50 U.S.C. 790).
       ``(g) Treatment of Certain Amounts Paid to or for the 
     Benefit of Institutions of Higher Education.--
       ``(1) In general.--For purposes of this section, 80 percent 
     of any amount described in

[[Page S3279]]

     paragraph (2) shall be treated as a charitable contribution.
       ``(2) Amount described.--For purposes of paragraph (1), an 
     amount is described in this paragraph if--
       ``(A) the amount is paid by the taxpayer to or for the 
     benefit of an educational organization--
       ``(i) which is described in subsection (d)(1)(B), and
       ``(ii) which is an institution of higher education (as 
     defined in section 3304(f)), and
       ``(B) such amount would be allowable as a deduction under 
     this section but for the fact that the taxpayer receives 
     (directly or indirectly) as a result of paying such amount 
     the right to purchase tickets for seating at an athletic 
     event in an athletic stadium of such institution.

     If any portion of a payment is for the purchase of such 
     tickets, such portion and the remaining portion (if any) of 
     such payment shall be treated as separate amounts for 
     purposes of this subsection.
       ``(h) Other Cross References.--
       ``(1) For treatment of certain organizations providing 
     child care, see section 501(k).
       ``(2) For charitable contributions of partners, see section 
     702.
       ``(3) For treatment of gifts for benefit of or use in 
     connection with the Naval Academy as gifts to or for the use 
     of the United States, see section 6973 of title 10, United 
     States Code.
       ``(4) For treatment of gifts accepted by the Secretary of 
     State, the Director of the International Communication 
     Agency, or the Director of the United States International 
     Development Cooperation Agency, as gifts to or for the use of 
     the United States, see section 25 of the State Department 
     Basic Authorities Act of 1956.
       ``(5) For treatment of gifts of money accepted by the 
     Attorney General for credit to the `Commissary Funds, Federal 
     Prisons' as gifts to or for the use of the United States, see 
     section 4043 of title 18, United States Code.
       ``(6) For charitable contributions to or for the use of 
     Indian tribal governments (or subdivisions of such 
     governments), see section 7871.

     ``SEC. 4. DEDUCTION FOR HOME ACQUISITION INDEBTEDNESS.

       ``(a) General Rule.--For purposes of this part, there shall 
     be allowed as a deduction all qualified residence interest 
     paid or accrued within the taxable year.
       ``(b) Qualified Residence Interest Defined.--The term 
     `qualified residence interest' means any interest which is 
     paid or accrued during the taxable year on acquisition 
     indebtedness with respect to any qualified residence of the 
     taxpayer. For purposes of the preceding sentence, the 
     determination of whether any property is a qualified 
     residence of the taxpayer shall be made as of the time the 
     interest is accrued.
       ``(c) Acquisition Indebtedness.--
       ``(1) In general.--The term `acquisition indebtedness' 
     means any indebtedness which--
       ``(A) is incurred in acquiring, constructing, or 
     substantially improving any qualified residence of the 
     taxpayer, and
       ``(B) is secured by such residence.

     Such term also includes any indebtedness secured by such 
     residence resulting from the refinancing of indebtedness 
     meeting the requirements of the preceding sentence (or this 
     sentence); but only to the extent the amount of the 
     indebtedness resulting from such refinancing does not exceed 
     the amount of the refinanced indebtedness.
       ``(2) $100,000 limitation.--The aggregate amount treated as 
     acquisition indebtedness for any period shall not exceed 
     $100,000 ($50,000 in the case of a married individual filing 
     a separate return).
       ``(d) Treatment of Indebtedness Incurred on or Before 
     October 13, 1987.--
       ``(1) In general.--In the case of any pre-October 13, 1987, 
     indebtedness--
       ``(A) such indebtedness shall be treated as acquisition 
     indebtedness, and
       ``(B) the limitation of subsection (b)(2) shall not apply.
       ``(2) Reduction in $100,000 limitation.--The limitation of 
     subsection (b)(2) shall be reduced (but not below zero) by 
     the aggregate amount of outstanding pre-October 13, 1987, 
     indebtedness.
       ``(3) Pre-october 13, 1987, indebtedness.--The term `pre-
     October 13, 1987, indebtedness' means--
       ``(A) any indebtedness which was incurred on or before 
     October 13, 1987, and which was secured by a qualified 
     residence on October 13, 1987, and at all times thereafter 
     before the interest is paid or accrued, or
       ``(B) any indebtedness which is secured by the qualified 
     residence and was incurred after October 13, 1987, to 
     refinance indebtedness described in subparagraph (A) (or 
     refinanced indebtedness meeting the requirements of this 
     subparagraph) to the extent (immediately after the 
     refinancing) the principal amount of the indebtedness 
     resulting from the refinancing does not exceed the principal 
     amount of the refinanced indebtedness (immediately before the 
     refinancing).
       ``(4) Limitation on period of refinancing.--Subparagraph 
     (B) of paragraph (3) shall not apply to any indebtedness 
     after--
       ``(A) the expiration of the term of the indebtedness 
     described in paragraph (3)(A), or
       ``(B) if the principal of the indebtedness described in 
     paragraph (3)(A) is not amortized over its term, the 
     expiration of the term of the first refinancing of such 
     indebtedness (or if earlier, the date which is 30 years after 
     the date of such first refinancing).
       ``(e) Other Definitions and Special Rules.--For purposes of 
     this section--
       ``(1) Qualified residence.--For purposes of this 
     subsection--
       ``(A) In general.--Except as provided in subparagraph (C), 
     the term `qualified residence' means the principal residence 
     of the taxpayer.
       ``(B) Married individuals filing separate returns.--If a 
     married couple does not file a joint return for the taxable 
     year--
       ``(i) such couple shall be treated as 1 taxpayer for 
     purposes of subparagraph (A), and
       ``(ii) each individual shall be entitled to take into 
     account \1/2\ of the principal residence unless both 
     individuals consent in writing to 1 individual taking into 
     account the principal residence.
       ``(C) Pre-october 13, 1987, indebtedness.--In the case of 
     any pre-October 13, 1987, indebtedness, the term `qualified 
     residence' has the meaning given that term in section 
     163(h)(4), as in effect on the day before the date of 
     enactment of this subparagraph.
       ``(2) Special rule for cooperative housing corporations.--
     Any indebtedness secured by stock held by the taxpayer as a 
     tenant-stockholder in a cooperative housing corporation shall 
     be treated as secured by the house or apartment which the 
     taxpayer is entitled to occupy as such a tenant-stockholder. 
     If stock described in the preceding sentence may not be used 
     to secure indebtedness, indebtedness shall be treated as so 
     secured if the taxpayer establishes to the satisfaction of 
     the Secretary that such indebtedness was incurred to acquire 
     such stock.
       ``(3) Unenforceable security interests.--Indebtedness shall 
     not fail to be treated as secured by any property solely 
     because, under any applicable State or local homestead or 
     other debtor protection law in effect on August 16, 1986, the 
     security interest is ineffective or the enforceability of the 
     security interest is restricted.
       ``(4) Special rules for estates and trusts.--For purposes 
     of determining whether any interest paid or accrued by an 
     estate or trust is qualified residence interest, any 
     residence held by such estate or trust shall be treated as a 
     qualified residence of such estate or trust if such estate or 
     trust establishes that such residence is a qualified 
     residence of a beneficiary who has a present interest in such 
     estate or trust or an interest in the residuary of such 
     estate or trust.

     ``SEC. 5. DEFINITIONS AND SPECIAL RULES.

       ``(a) Definition of Surviving Spouse.--
       ``(1) In general.--For purposes of this part, the term 
     `surviving spouse' means a taxpayer--
       ``(A) whose spouse died during either of the taxpayer's 2 
     taxable years immediately preceding the taxable year, and
       ``(B) who maintains as the taxpayer's home a household 
     which constitutes for the taxable year the principal place of 
     abode (as a member of such household) of a dependent--
       ``(i) who (within the meaning of subsection (d)) is a son, 
     stepson, daughter, or stepdaughter of the taxpayer, and
       ``(ii) with respect to whom the taxpayer is entitled to a 
     deduction for the taxable year under section 2.

     For purposes of this paragraph, an individual shall be 
     considered as maintaining a household only if over one-half 
     of the cost of maintaining the household during the taxable 
     year is furnished by such individual.
       ``(2) Limitations.--Notwithstanding paragraph (1), for 
     purposes of this part a taxpayer shall not be considered to 
     be a surviving spouse--
       ``(A) if the taxpayer has remarried at any time before the 
     close of the taxable year, or
       ``(B) unless, for the taxpayer's taxable year during which 
     the taxpayer's spouse died, a joint return could have been 
     made under the provisions of section 6013 (without regard to 
     subsection (a)(3) thereof).
       ``(3) Special rule where deceased spouse was in missing 
     status.--If an individual was in a missing status (within the 
     meaning of section 6013(f)(3)) as a result of service in a 
     combat zone and if such individual remains in such status 
     until the date referred to in subparagraph (A) or (B), then, 
     for purposes of paragraph (1)(A), the date on which such 
     individual dies shall be treated as the earlier of the date 
     determined under subparagraph (A) or the date determined 
     under subparagraph (B):
       ``(A) The date on which the determination is made under 
     section 556 of title 37 of the United States Code or under 
     section 5566 of title 5 of such Code (whichever is 
     applicable) that such individual died while in such missing 
     status.
       ``(B) Except in the case of the combat zone designated for 
     purposes of the Vietnam conflict, the date which is 2 years 
     after the date designated as the date of termination of 
     combatant activities in that zone.
       ``(b) Definition of Head of Household.--
       ``(1) In general.--For purposes of this part, an individual 
     shall be considered a head of a household if, and only if, 
     such individual is not married at the close of such 
     individual's taxable year, is not a surviving spouse (as 
     defined in subsection (a)), and either--
       ``(A) maintains as such individual's home a household which 
     constitutes for more than one-half of such taxable year the 
     principal place of abode, as a member of such household, of--
       ``(i) a son, stepson, daughter, or stepdaughter of the 
     taxpayer, or a descendant of a son or daughter of the 
     taxpayer, but if such son, stepson, daughter, stepdaughter, 
     or descendant is married at the close of the taxpayer's 
     taxable year, only if the taxpayer is entitled to a deduction 
     for the taxable year

[[Page S3280]]

     for such person under section 2 (or would be so entitled but 
     for subparagraph (B) or (D) of subsection (d)(5)), or
       ``(ii) any other person who is a dependent of the taxpayer, 
     if the taxpayer is entitled to a deduction for the taxable 
     year for such person under section 2, or
       ``(B) maintains a household which constitutes for such 
     taxable year the principal place of abode of the father or 
     mother of the taxpayer, if the taxpayer is entitled to a 
     deduction for the taxable year for such father or mother 
     under section 2.

     For purposes of this paragraph, an individual shall be 
     considered as maintaining a household only if over one-half 
     of the cost of maintaining the household during the taxable 
     year is furnished by such individual.
       ``(2) Determination of status.--For purposes of this 
     subsection--
       ``(A) a legally adopted child of a person shall be 
     considered a child of such person by blood;
       ``(B) an individual who is legally separated from such 
     individual's spouse under a decree of divorce or of separate 
     maintenance shall not be considered as married;
       ``(C) a taxpayer shall be considered as not married at the 
     close of such taxpayer's taxable year if at any time during 
     the taxable year such taxpayer's spouse is a nonresident 
     alien; and
       ``(D) a taxpayer shall be considered as married at the 
     close of such taxpayer's taxable year if such taxpayer's 
     spouse (other than a spouse described in subparagraph (C)) 
     died during the taxable year.
       ``(3) Limitations.--Notwithstanding paragraph (1), for 
     purposes of this part, a taxpayer shall not be considered to 
     be a head of a household--
       ``(A) if at any time during the taxable year the taxpayer 
     is a nonresident alien; or
       ``(B) by reason of an individual who would not be a 
     dependent for the taxable year but for--
       ``(i) subparagraph (I) of subsection (d)(1), or
       ``(ii) paragraph (3) of subsection (d).
       ``(c) Certain Married Individuals Living Apart.--For 
     purposes of this part, an individual shall be treated as not 
     married at the close of the taxable year if such individual 
     is so treated under the provisions of section 7703(b).
       ``(d) Dependent Defined.--
       ``(1) General definition.--For purposes of this part, the 
     term `dependent' means any of the following individuals over 
     one-half of whose support, for the calendar year in which the 
     taxable year of the taxpayer begins, was received from the 
     taxpayer (or is treated under paragraph (3) or (5) as 
     received from the taxpayer):
       ``(A) A son or daughter of the taxpayer, or a descendant of 
     either.
       ``(B) A stepson or stepdaughter of the taxpayer.
       ``(C) A brother, sister, stepbrother, or stepsister of the 
     taxpayer.
       ``(D) The father or mother of the taxpayer, or an ancestor 
     of either.
       ``(E) A stepfather or stepmother of the taxpayer.
       ``(F) A son or daughter of a brother or sister of the 
     taxpayer.
       ``(G) A brother or sister of the father or mother of the 
     taxpayer.
       ``(H) A son-in-law, daughter-in-law, father-in-law, mother-
     in-law, brother-in-law, or sister-in-law of the taxpayer.
       ``(I) An individual (other than an individual who at any 
     time during the taxable year was the spouse, determined 
     without regard to section 7703, of the taxpayer) who, for the 
     taxable year of the taxpayer, has as such individual's 
     principal place of abode the home of the taxpayer and is a 
     member of the taxpayer's household.
       ``(2) Rules relating to general definition.--For purposes 
     of this section--
       ``(A) Brother; sister.--The terms `brother' and `sister' 
     include a brother or sister by the halfblood.
       ``(B) Child.--In determining whether any of the 
     relationships specified in paragraph (1) or subparagraph (A) 
     of this paragraph exists, a legally adopted child of an 
     individual (and a child who is a member of an individual's 
     household, if placed with such individual by an authorized 
     placement agency for legal adoption by such individual), or a 
     foster child of an individual (if such child satisfies the 
     requirements of paragraph (1)(I) with respect to such 
     individual), shall be treated as a child of such individual 
     by blood.
       ``(C) Citizenship.--The term `dependent' does not include 
     any individual who is not a citizen or national of the United 
     States unless such individual is a resident of the United 
     States or of a country contiguous to the United States. The 
     preceding sentence shall not exclude from the definition of 
     `dependent' any child of the taxpayer legally adopted by such 
     taxpayer, if, for the taxable year of the taxpayer, the child 
     has as such child's principal place of abode the home of the 
     taxpayer and is a member of the taxpayer's household, and if 
     the taxpayer is a citizen or national of the United States.
       ``(D) Alimony, etc.--A payment to a wife which is alimony 
     or separate maintenance shall not be treated as a payment by 
     the wife's husband for the support of any dependent.
       ``(E) Unlawful arrangements.--An individual is not a member 
     of the taxpayer's household if at any time during the taxable 
     year of the taxpayer the relationship between such individual 
     and the taxpayer is in violation of local law.
       ``(3) Multiple support agreements.--For purposes of 
     paragraph (1), over one-half of the support of an individual 
     for a calendar year shall be treated as received from the 
     taxpayer if--
       ``(A) no one person contributed over one-half of such 
     support;
       ``(B) over one-half of such support was received from 
     persons each of whom, but for the fact that such person did 
     not contribute over one-half of such support, would have been 
     entitled to claim such individual as a dependent for a 
     taxable year beginning in such calendar year;
       ``(C) the taxpayer contributed over 10 percent of such 
     support; and
       ``(D) each person described in subparagraph (B) (other than 
     the taxpayer) who contributed over 10 percent of such support 
     files a written declaration (in such manner and form as the 
     Secretary may by regulations prescribe) that such person will 
     not claim such individual as a dependent for any taxable year 
     beginning in such calendar year.
       ``(4) Special support test in case of students.--For 
     purposes of paragraph (1), in the case of any individual who 
     is--
       ``(A) a son, stepson, daughter, or stepdaughter of the 
     taxpayer (within the meaning of this subsection), and
       ``(B) a student,

     amounts received as scholarships for study at an educational 
     organization described in section 3(d)(1)(B) shall not be 
     taken into account in determining whether such individual 
     received more than one-half of such individual's support from 
     the taxpayer.
       ``(5) Support test in case of child of divorced parents, 
     etc.--
       ``(A) Custodial parent gets exemption.--Except as otherwise 
     provided in this paragraph, if--
       ``(i) a child receives over one-half of such child's 
     support during the calendar year from such child's parents--

       ``(I) who are divorced or legally separated under a decree 
     of divorce or separate maintenance,
       ``(II) who are separated under a written separation 
     agreement, or
       ``(III) who live apart at all times during the last 6 
     months of the calendar year, and

       ``(ii) such child is in the custody of 1 or both of such 
     child's parents for more than one-half of the calendar year,

     such child shall be treated, for purposes of paragraph (1), 
     as receiving over one-half of such child's support during the 
     calendar year from the parent having custody for a greater 
     portion of the calendar year (hereafter in this paragraph 
     referred to as the `custodial parent').
       ``(B) Exception where custodial parent releases claim to 
     exemption for the year.--A child of parents described in 
     subparagraph (A) shall be treated as having received over 
     one-half of such child's support during a calendar year from 
     the noncustodial parent if--
       ``(i) the custodial parent signs a written declaration (in 
     such manner and form as the Secretary may by regulations 
     prescribe) that such custodial parent will not claim such 
     child as a dependent for any taxable year beginning in such 
     calendar year, and
       ``(ii) the noncustodial parent attaches such written 
     declaration to the noncustodial parent's return for the 
     taxable year beginning during such calendar year.

     For purposes of this paragraph, the term `noncustodial 
     parent' means the parent who is not the custodial parent.
       ``(C) Exception for multiple-support agreement.--This 
     paragraph shall not apply in any case where over one-half of 
     the support of the child is treated as having been received 
     from a taxpayer under the provisions of paragraph (3).
       ``(D) Exception for certain pre-1985 instruments.--
       ``(i) In general.--A child of parents described in 
     subparagraph (A) shall be treated as having received over 
     one-half such child's support during a calendar year from the 
     noncustodial parent if--

       ``(I) a qualified pre-1985 instrument between the parents 
     applicable to the taxable year beginning in such calendar 
     year provides that the noncustodial parent shall be entitled 
     to any deduction allowable under section 2 for such child, 
     and
       ``(II) the noncustodial parent provides at least $600 for 
     the support of such child during such calendar year.

     For purposes of this clause, amounts expended for the support 
     of a child or children shall be treated as received from the 
     noncustodial parent to the extent that such parent provided 
     amounts for such support.
       ``(ii) Qualified pre-1985 instrument.--For purposes of this 
     subparagraph, the term `qualified pre-1985 instrument' means 
     any decree of divorce or separate maintenance or written 
     agreement--

       ``(I) which is executed before January 1, 1985,
       ``(II) which on such date contains the provision described 
     in clause (i)(I), and
       ``(III) which is not modified on or after such date in a 
     modification which expressly provides that this subparagraph 
     shall not apply to such decree or agreement.

       ``(E) Special rule for support received from new spouse of 
     parent.--For purposes of this paragraph, in the case of the 
     remarriage of a parent, support of a child received from the 
     parent's spouse shall be treated as received from the parent.

                 ``PART II--TAX ON BUSINESS ACTIVITIES

``Sec. 11. Tax imposed on business activities.

[[Page S3281]]

     ``SEC. 11. TAX IMPOSED ON BUSINESS ACTIVITIES.

       ``(a) Tax Imposed.--There is hereby imposed on every person 
     engaged in a business activity located in the United States a 
     tax equal to 20 percent of the business taxable income of 
     such person.
       ``(b) Liability for Tax.--The tax imposed by this section 
     shall be paid by the person engaged in the business activity, 
     whether such person is an individual, partnership, 
     corporation, or otherwise.
       ``(c) Business Taxable Income.--
       ``(1) In general.--For purposes of this section, the term 
     `business taxable income' means gross active income reduced 
     by the deductions specified in subsection (d).
       ``(2) Gross active income.--For purposes of paragraph (1), 
     the term `gross active income' means gross income other than 
     investment income.
       ``(d) Deductions.--
       ``(1) In general.--The deductions specified in this 
     subsection are--
       ``(A) the cost of business inputs for the business 
     activity,
       ``(B) the compensation (including contributions to 
     qualified retirement plans but not including other fringe 
     benefits) paid for employees performing services in such 
     activity, and
       ``(C) the cost of personal and real property used in such 
     activity.
       ``(2) Business inputs.--
       ``(A) In general.--For purposes of paragraph (1)(A), the 
     term `cost of business inputs' means--
       ``(i) the actual cost of goods, services, and materials, 
     whether or not resold during the taxable year, and
       ``(ii) the actual cost, if reasonable, of travel and 
     entertainment expenses for business purposes.
       ``(B) Purchases of goods and services excluded.--Such term 
     shall not include purchases of goods and services provided to 
     employees or owners.
       ``(C) Certain lobbying and political expenditures 
     excluded.--
       ``(i) In general.--Such term shall not include any amount 
     paid or incurred in connection with--

       ``(I) influencing legislation,
       ``(II) participation in, or intervention in, any political 
     campaign on behalf of (or in opposition to) any candidate for 
     public office,
       ``(III) any attempt to influence the general public, or 
     segments thereof, with respect to elections, legislative 
     matters, or referendums, or
       ``(IV) any direct communication with a covered executive 
     branch official in an attempt to influence the official 
     actions or positions of such official.

       ``(ii) Exception for local legislation.--In the case of any 
     legislation of any local council or similar governing body--

       ``(I) clause (i)(I) shall not apply, and
       ``(II) such term shall include all ordinary and necessary 
     expenses (including, but not limited to, traveling expenses 
     described in subparagraph (A)(iii) and the cost of preparing 
     testimony) paid or incurred during the taxable year in 
     carrying on any trade or business--

       ``(aa) in direct connection with appearances before, 
     submission of statements to, or sending communications to the 
     committees, or individual members, of such council or body 
     with respect to legislation or proposed legislation of direct 
     interest to the taxpayer, or
       ``(bb) in direct connection with communication of 
     information between the taxpayer and an organization of which 
     the taxpayer is a member with respect to any such legislation 
     or proposed legislation which is of direct interest to the 
     taxpayer and to such organization, and that portion of the 
     dues so paid or incurred with respect to any organization of 
     which the taxpayer is a member which is attributable to the 
     expenses of the activities carried on by such organization.
       ``(iii) Application to dues of tax-exempt organizations.--
     Such term shall include the portion of dues or other similar 
     amounts paid by the taxpayer to an organization which is 
     exempt from tax under this subtitle which the organization 
     notifies the taxpayer under section 6033(e)(1)(A)(ii) is 
     allocable to expenditures to which clause (i) applies.
       ``(iv) Influencing legislation.--For purposes of this 
     subparagraph--

       ``(I) In general.--The term `influencing legislation' means 
     any attempt to influence any legislation through 
     communication with any member or employee of a legislative 
     body, or with any government official or employee who may 
     participate in the formulation of legislation.
       ``(II) Legislation.--The term `legislation' has the meaning 
     given that term in section 4911(e)(2).

       ``(v) Other special rules.--

       ``(I) Exception for certain taxpayers.--In the case of any 
     taxpayer engaged in the trade or business of conducting 
     activities described in clause (i), clause (i) shall not 
     apply to expenditures of the taxpayer in conducting such 
     activities directly on behalf of another person (but shall 
     apply to payments by such other person to the taxpayer for 
     conducting such activities).
       ``(II) De minimis exception.--

       ``(aa) In general.--Clause (i) shall not apply to any in-
     house expenditures for any taxable year if such expenditures 
     do not exceed $2,000. In determining whether a taxpayer 
     exceeds the $2,000 limit, there shall not be taken into 
     account overhead costs otherwise allocable to activities 
     described in subclauses (I) and (IV) of clause (i).
       ``(bb) In-house expenditures.--For purposes of provision 
     (aa), the term `in-house expenditures' means expenditures 
     described in subclauses (I) and (IV) of clause (i) other than 
     payments by the taxpayer to a person engaged in the trade or 
     business of conducting activities described in clause (i) for 
     the conduct of such activities on behalf of the taxpayer, or 
     dues or other similar amounts paid or incurred by the 
     taxpayer which are allocable to activities described in 
     clause (i).

       ``(III) Expenses incurred in connection with lobbying and 
     political activities.--Any amount paid or incurred for 
     research for, or preparation, planning, or coordination of, 
     any activity described in clause (i) shall be treated as paid 
     or incurred in connection with such activity.

       ``(vi) Covered executive branch official.--For purposes of 
     this subparagraph, the term `covered executive branch 
     official' means--

       ``(I) the President,
       ``(II) the Vice President,
       ``(III) any officer or employee of the White House Office 
     of the Executive Office of the President, and the 2 most 
     senior level officers of each of the other agencies in such 
     Executive Office, and
       ``(IV) any individual serving in a position in level I of 
     the Executive Schedule under section 5312 of title 5, United 
     States Code, any other individual designated by the President 
     as having Cabinet level status, and any immediate deputy of 
     such an individual.

       ``(vii) Special rule for indian tribal governments.--For 
     purposes of this subparagraph, an Indian tribal government 
     shall be treated in the same manner as a local council or 
     similar governing body.
       ``(viii) Cross Reference.--

  ``For reporting requirements and alternative taxes related to this 
subsection, see section 6033(e).

       ``(e) Carryover of Excess Deductions.--
       ``(1) In general.--If the aggregate deductions for any 
     taxable year exceed the gross active income for such taxable 
     year, the amount of the deductions specified in subsection 
     (d) for the succeeding taxable year (determined without 
     regard to this subsection) shall be increased by the sum of--
       ``(A) such excess, plus
       ``(B) the product of such excess and the 3-month Treasury 
     rate for the last month of such taxable year.
       ``(2) 3-month treasury rate.--For purposes of paragraph 
     (1), 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) Conforming Repeals and Redesignations.--
       (1) Repeals.--The following subchapters of chapter 1 of 
     subtitle A and the items relating to such subchapters in the 
     table of subchapters for such chapter 1 are repealed:
       (A) Subchapter B (relating to computation of taxable 
     income).
       (B) Subchapter C (relating to corporate distributions and 
     adjustments).
       (C) Subchapter D (relating to deferred compensation, etc.).
       (D) Subchapter G (relating to corporations used to avoid 
     income tax on shareholders).
       (E) Subchapter H (relating to banking institutions).
       (F) Subchapter I (relating to natural resources).
       (G) Subchapter J (relating to estates, trusts, 
     beneficiaries, and decedents).
       (H) Subchapter L (relating to insurance companies).
       (I) Subchapter M (relating to regulated investment 
     companies and real estate investment trusts).
       (J) Subchapter N (relating to tax based on income from 
     sources within or without the United States).
       (K) Subchapter O (relating to gain or loss on disposition 
     of property).
       (L) Subchapter P (relating to capital gains and losses).
       (M) Subchapter Q (relating to readjustment of tax between 
     years and special limitations).
       (N) Subchapter S (relating to tax treatment of S 
     corporations and their shareholders).
       (O) Subchapter T (relating to cooperatives and their 
     patrons).
       (P) Subchapter U (relating to designation and treatment of 
     empowerment zones, enterprise communities, and rural 
     development investment areas).
       (Q) Subchapter V (relating to title 11 cases).
       (2) Redesignations.--The following subchapters of chapter 1 
     of subtitle A and the items relating to such subchapters in 
     the table of subchapters for such chapter 1 are redesignated:
       (A) Subchapter E (relating to accounting periods and 
     methods of accounting) as subchapter B.
       (B) Subchapter F (relating to exempt organizations) as 
     subchapter C.
       (C) Subchapter K (relating to partners and partnerships) as 
     subchapter D.

     SEC. 3. REPEAL OF ESTATE AND GIFT TAXES.

       Subtitle B (relating to estate, gift, and generation-
     skipping taxes) and the item relating to such subtitle in the 
     table of subtitles is repealed.

     SEC. 4. ADDITIONAL REPEALS.

       Subtitles H (relating to financing of presidential election 
     campaigns) and J (relating

[[Page S3282]]

     to coal industry health benefits) and the items relating to 
     such subtitles in the table of subtitles are repealed.

     SEC. 5. EFFECTIVE DATES.

       (a) In General.--Except as provided in subsection (b), the 
     amendments made by this Act apply to taxable years beginning 
     after December 31, 1997.
       (b) Repeal of Estate and Gift Taxes.--The repeal made by 
     section 3 applies to estates of decedents dying, and 
     transfers made, after December 31, 1997.
       (c) Technical and Conforming Changes.--The Secretary of the 
     Treasury or the Secretary's delegate shall, as soon as 
     practicable but in any event not later than 90 days after the 
     date of enactment of this Act, submit to the Committee on 
     Ways and Means of the House of Representatives and the 
     Committee on Finance of the Senate a draft of any technical 
     and conforming changes in the Internal Revenue Code of 1986 
     which are necessary to reflect throughout such Code the 
     changes in the substantive provisions of law made by this 
     Act.
                                 ______