[Congressional Record Volume 144, Number 21 (Thursday, March 5, 1998)]
[Senate]
[Pages S1436-S1440]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mrs. HUTCHISON (for herself, Mr. Grams, and Mr. Ashcroft):
  S. 1711. A bill to amend the Internal Revenue Code of 1986 to 
eliminate the marriage penalty tax, to increase the income levels for 
the 15 and 28 percent tax brackets, to provide a 1-year holding period 
for long-term capital gains, to index capital assets for inflation, to 
reduce the highest estate tax rate to 28 percent, and for other 
purposes; to the Committee on Finance.


             THE TAX RELIEF AND DEBT REDUCTION ACT OF 1998

  Mrs. HUTCHISON. Mr. President, today Senator Rod Grams and I are 
introducing the half-and-half bill. We like to say half-and-half is 
more than just rich milk. We want to have the plan in place so if we, 
in fact, have a surplus, we will start doing the responsible thing for 
the people of our country. We believe half should go to debt reduction, 
to start paying down the $5 trillion debt, and half should go to tax 
relief for the hard-working American family.
  The Federal tax burden today is the greatest that it has been in the 
history of our country. In fact, 38.3 percent of the average family 
income is spent on taxes. That is a whale of a burden on people who are 
trying to raise children, trying to put them through college, and we 
are very pleased to try to bring down that tax burden with the half-
and-half Tax Relief and Debt Reduction Act of 1998.
  This is what our bill does. First, it eliminates the marriage tax 
penalty by allowing couples to file as singles. Mr. President, 21 
million American couples today pay an average of $1,400 more because 
they got married. You see behind me an example, and this is a real 
example. A first-year schoolteacher in Houston is paid $27,000. A 
rookie police officer in Houston, TX starts out at $29,698. After they 
get married, their tax burden will be $638.44 more, just because they 
got married. We do not think that is right. We do not believe that 
Americans should have to choose between love and money. We want an 
equitable and fair burden on the taxpayers of this country, and we do 
not think that people who get married, who are both working, should 
have to pay more taxes.
  The second thing our bill does is raise the income levels for the 15 
and 28 percent tax brackets. For a single person, before he or she 
would move into the 28 percent bracket, it would go up to $35,000; a 
married couple, $50,000, and for a head of household it would be 
$40,000. The 28 percent bracket would be expanded for a single person 
to $71,050; a married couple at $109,950, and head of household $93,750
  It is very important that we start giving that relief at these lower 
income and middle income levels, and that is what this bill will do.
  The bill also repeals the 18-month capital gains holding period and 
makes it 12 months instead. It is a fact that our elderly people pay 
the most in capital gains taxes, and we think that is wrong. So we are 
going to try to reduce the holding period so our elderly people who may 
have to sell assets to live on will not be burdened any more than is 
absolutely necessary.
  We index capital gains taxes for inflation in our bill. Taxpayers 
should not have to pay a capital gains tax in assets that have 
increased in value simply due to inflation. Last year we started this 
process of by allowing an exemption of $500,000 in capital gains for 
the sale of a home. That's a big help to an elderly person. We want to 
make it even easier for them.
  We would cut the top estate tax rate from 55 percent to 28 percent. 
We believe estate taxes take away from the ability of Americans to 
realize the American dream of giving their children a better start.
  So we are trying to bring down the tax burden on the hard-working 
American family. We believe it is important that people be able to keep 
more of the money they earn, and 38 percent of the average American's 
pay, salary, going to taxes, is too much of a burden. So I am very 
pleased Senator Grams has come on as the major cosponsor of this bill.
  Mr. GRAMS: Mr. President, I rise today to join Senator Hutchison in 
introducing legislation to lockbox any budget surplus for tax relief 
and national debt reduction. Given this week's budget surplus 
projections, the ``Tax Relief and Debt Reduction Act of 1998'' is the 
right legislation at the right time.
  Eighty-five years ago this week, the Internal Revenue Service began 
collecting the individual income tax, initiating 85 years of ever-
increasing hardship for America's taxpaying families. Now, with a 
budget surplus closer and taxes at an all-time high, it is time that 
Washington let the taxpayers keep more of their own money, so that 
families can spend it meeting their own needs--whether that is child 
care, health insurance, clothing, or groceries. By dedicating half of 
any budget surplus to reducing the debt and the other half to family 
tax relief, Senator Hutchison's legislation protects the taxpayers of 
today while reducing the burden on the taxpayers of tomorrow. I commend 
her for her leadership on this timely issue.
  Mr. President, I would like to offer some perspective into why we are 
introducing the ``Tax Relief and Debt Reduction Act" today.
  If it seems as though the media has a label for everyone these days, 
blame it on the era of the 15-second sound bite. At a point in history 
when many in the media consider brevity the most virtuous of virtues, 
journalists compete for our attention by whittling down their words 
into a kind of reporter's shorthand that, over time, becomes 
meaningless to news consumers.
  The shorthand gets especially muddied when it is applied to politics. 
Once a person enters public office, the media is quick to toss them a 
label--conservative or liberal, left wing or right wing. As political 
realities evolve, though, the labels have less and less relevance as 
time goes on. They become a cliche, no longer very useful in describing 
a political philosophy.
  I believe the American public has already moved beyond the media in 
breaking from the label mentality, and whether they consider it 
consciously, they have shifted their thinking from the old concept of 
liberal versus conservative to that of taxpayers versus big Government. 
Today, every action of the government is being evaluated by a standard 
that strikes home for the folks who work for a living, raise a family, 
and pay their taxes: does it benefit the taxpayers or does it benefit 
the Government?
  What we have discovered through this new way of thinking is that far 
too often, the Government is prospering at the expense of the 
taxpayers. Too much faith in Government equals less freedom for 
families and individuals. Dependency on Government equals less 
independence for the governed. And as the Government prospers, we have 
learned that big Government does not necessarily translate into better 
Government--it is just bigger Government, with more bureaucracy, paid 
for by higher taxes.
  Families today are taxed at the highest levels since World War II, 
with 38 percent of a typical family's budget going to pay taxes on the 
Federal, State, and local level. In nominal dollars, a two-income 
family is paying more just in taxes today than their paychecks totaled 
in 1977. That is nearly 50% more than they are spending for food, 
shelter, and clothing combined.
  Taxpayers do not mind paying taxes when they can see results. In 
local government, the results are obvious: clean streets, police cars 
on patrol, regular garbage pickup. On the Federal level, the results 
are much less evident. Families want to believe Washington is

[[Page S1437]]

spending their tax dollars prudently, but when the evening newscasts 
focus repeatedly on the ``fleecing of America,'' they wonder: is the 
Government serving the taxpayers, or just serving itself?
  There is no question the Federal Government is growing bigger. 
Contrary to the claim of President Clinton in his State of the Union 
address that ``we have the smallest Government in 35 years,'' the 
Federal Government will spend more tax dollars in 1998 than it has in 
the history of this nation--$1.7 trillion. That is a 19 percent 
increase since the President took office in 1993, although inflation 
during that same period has risen less than 14 percent.
  The President would add thousands of new civilian federal employees 
and, according to an analysis of his budget by the Senate Budget 
Committee, $123 billion in new federal programs that would touch nearly 
every aspect of daily life, from our classrooms to our boardrooms to 
our bedrooms.
  To pay for all that new government, the President calls for boosting 
taxes by $115 billion over the next five years. That is a massive hike 
that would effectively wipe out the hard-fought $85 billion tax cut 
Americans won under last year's Taxpayer Relief Act.
  A big, expensive federal government is a bad deal for the taxpayers. 
It is an even worse deal for my fellow Minnesotans. A recent study 
conducted by the Northeast-Midwest Institute shows that Minnesota ranks 
49th of 50 states in Federal dollars returned to the State. The people 
of Minnesota pay one of highest tax rates in the Nation, but only one 
other state receives less service in return from the Federal 
Government.
  According to the National Taxpayers Union, if Congress could roll 
federal domestic spending back to 1969 levels, a family of four would 
keep $9,000 a year more of its own money than it does today. Millions 
of families would pay no income tax at all. Unfortunately, tax-and-
spend, not tax relief and streamlining, is the policy Washington now 
pursues.
  The most disturbing sign that the taxpayers are losing the 
``taxpayers versus big government'' debate is the rush in Washington to 
spend a budget surplus that does not yet exist. If a surplus does 
develop, the Government has no claim on it because the Government did 
not generate it. A surplus will be borne of the sweat and hard work of 
the American people, and it therefore should be returned to the people 
as called for under the ``Tax Relief and Debt Reduction Act of 1998.''
  When Washington serves itself instead of meeting the needs of its 
owners, the taxpayers, spending rises, taxes increase, responsibilities 
are neglected, and people begin to feel constricted by a Government 
they sense is deeply out of touch. At their urging, we have begun to 
turn the focus away from the smothering squeeze of big government 
toward families and new partnerships that move Washington from the 
center of the circle to another spoke along its hub. Where the Federal 
Government once held all the power, communities--local churches, 
nonprofit organizations, job providers, individual volunteers, and 
charities of all types--have stepped forward to work with neighbors to 
attack problems on the local level.
  Freedom for families also means giving families the freedom to spend 
more of their own dollars as they choose. We have taken steps in 
Washington to return more of that control to working Minnesotans and 
all working Americans, through tax relief, beginning with passage last 
year of the $500 per-child tax credit.
  Mr. President, the states offer us an excellent model of how we 
should use a future budget surplus. In recent years, many Republican 
governors cut taxes and shrank the size of their governments, and in 
the process turned budget deficits into surpluses. They are now using 
those surpluses to provide further tax relief. Take my own State of 
Minnesota, for example. When Governor Arne Carlson was elected to 
office in 1990, he inherited a deficit greater than $1.8 billion and a 
government that was spending 15 percent faster than the rate of 
inflation. Today, the State government has a $1.3 billion budget 
surplus. Now the Governor is using the surplus to give Minnesotans a 
property tax cut and an increase in the education homestead credit. 
Returning a future surplus to those who created it, the Nation's 
hardworking taxpayers, is the right way to use that surplus.
  I agree with President Clinton that saving Social Security is vitally 
important. But I believe we can save Social Security and provide tax 
relief simultaneously, if we have the political will to enact sound 
fiscal policies. The best way to save Social Security is to stop 
looting the Social Security surplus to fund general Government 
programs, return the borrowed surplus to the trust funds, and begin 
real reform to change the system from ``paygo'' to one that is 
prefunded.
  As the Federal Government has grown, it is ironic that it has grown 
further away from the one thing from which it derives its strength. And 
that is the people. In 1998, Congress and the President have the power 
to bring government closer to the people, to refocus its attention on 
serving the taxpayers, not fortifying itself. Yet, while Washington may 
have the power to change, does it have the resolve to change? I believe 
it does, because if we intend to reduce the growing burden awaiting the 
next generation of taxpayers, ``Failure is not an option.''
  In closing, the Hutchison legislation would help move government 
toward the taxpayers and toward greater accountability, and I urge my 
colleagues to support it.
  Mrs. HUTCHISON addressed the Chair.
  The PRESIDING OFFICER. The Senator from Texas.
  Mrs. HUTCHISON. Mr. President, I thank Senator Grams for taking a 
leadership role in this. He has been dedicated, since he was elected to 
the U.S. Senate, to sound fiscal policies. I think this bill is a sound 
approach to any surplus that we might have. I appreciate his 
cosponsorship.
  I ask unanimous consent to add Senator Ashcroft as a third original 
cosponsor of the bill.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mrs. HUTCHISON. Mr. President, just to sum up. I think the Hutchison-
Grams-Ashcroft half and half bill is sound policy. It is a responsible 
approach. If we, indeed, have worked hard and cut the deficits and will 
go toward a balanced budget even sooner than we thought, I think we 
create a great dilemma of what to do with the surplus. Because we have 
worked so hard and become more efficient, I hope we will take this 
opportunity not to backslide, not to go into more spending programs 
that will put us in the same situation we were before, but instead take 
the opportunity to start paying down the $5 trillion debt.
  So this would be an opportunity to start paying down the debt and put 
in the pockets of hard-working Americans more of the money they earn. 
Thirty-eight percent of a person's income is too much to be doling out 
to Government programs that you may or may not think are a good 
priority.
  So we are going to try to lessen that at the same time that we begin 
to pay down the debt so our children and grandchildren will not have to 
take from us that kind of burden. Thank you, Mr. President. I thank the 
managers of the bill for allowing us to take this time to introduce the 
bill.
  Mr. President, I ask unanimous consent that the text of the bill be 
printed in the Record.
  There being no objection, the bill was ordered to be printed in the 
record, as follows:

                                S. 1711

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

     SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.

       (a) Short Title.--This Act may be cited as the ``Half and 
     Half: Tax Relief and Debt Reduction Act of 1998''.
       (b) 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.
       (c) Section 15 Not To Apply.--No amendment made by section 
     3 shall be treated as a change in a rate of tax for purposes 
     of section 15 of the Internal Revenue Code of 1986.

     SEC. 2. COMBINED RETURN TO WHICH UNMARRIED RATES APPLY.

       (a) In General.--Subpart B of part II of subchapter A of 
     chapter 61 (relating to income tax returns) is amended by 
     inserting after section 6013 the following new section:

[[Page S1438]]

     ``SEC. 6013A. COMBINED RETURN WITH SEPARATE RATES.

       ``(a) General Rule.--A husband and wife may make a combined 
     return of income taxes under subtitle A under which--
       ``(1) a separate taxable income is determined for each 
     spouse by applying the rules provided in this section, and
       ``(2) the tax imposed by section 1 is the aggregate amount 
     resulting from applying the separate rates set forth in 
     section 1(c) to each such taxable income.
       ``(b) Treatment of Income.--For purposes of this section--
       ``(1) earned income (within the meaning of section 911(d)), 
     and any income received as a pension or annuity which arises 
     from an employer-employee relationship, shall be treated as 
     the income of the spouse who rendered the services, and
       ``(2) income from property shall be divided between the 
     spouses in accordance with their respective ownership rights 
     in such property.
       ``(c) Treatment of Deductions.--For purposes of this 
     section--
       ``(1) except as otherwise provided in this subsection, the 
     deductions allowed by section 62(a) shall be allowed to the 
     spouse treated as having the income to which such deductions 
     relate,
       ``(2) the deduction for retirement savings described in 
     paragraph (7) of section 62(a) shall be allowed to the spouse 
     for whose benefit the savings are maintained,
       ``(3) the deduction for alimony described in paragraph (10) 
     of section 62(a) shall be allowed to the spouse who has the 
     liability to pay the alimony,
       ``(4) the deduction referred to in paragraph (16) of 
     section 62(a) (relating to contributions to medical savings 
     accounts) shall be allowed to the spouse with respect to 
     whose employment or self-employment such account relates,
       ``(5) the deductions allowable by section 151 (relating to 
     personal exemptions) shall be determined by requiring each 
     spouse to claim 1 personal exemption,
       ``(6) section 63 shall be applied as if such spouses were 
     not married, and
       ``(7) each spouse's share of all other deductions 
     (including the deduction for personal exemptions under 
     section 151(c)) shall be determined by multiplying the 
     aggregate amount thereof by the fraction--
       ``(A) the numerator of which is such spouse's adjusted 
     gross income, and
       ``(B) the denominator of which is the combined adjusted 
     gross incomes of the 2 spouses.

     Any fraction determined under paragraph (7) shall be rounded 
     to the nearest percentage point.
       ``(d) Treatment of Credits.--Credits shall be determined 
     (and applied against the joint liability of the couple for 
     tax) as if the spouses had filed a joint return.
       ``(e) Treatment as Joint Return.--Except as otherwise 
     provided in this section or in the regulations prescribed 
     hereunder, for purposes of this title (other than sections 1 
     and 63(c)) a combined return under this section shall be 
     treated as a joint return.
       ``(f) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     this section.''.
       (b) Unmarried Rate Made Applicable.--So much of subsection 
     (c) of section 1 as precedes the table is amended to read as 
     follows:
       ``(c) Separate or Unmarried Return Rate.--There is hereby 
     imposed on the taxable income of every individual (other than 
     a married individual (as defined in section 7703) filing a 
     joint return or a separate return, a surviving spouse as 
     defined in section 2(a), or a head of household as defined in 
     section 2(b)) a tax determined in accordance with the 
     following table:''.
       (c) Basic Standard Deduction for Unmarried Individuals Made 
     Applicable.--Subparagraph (C) of section 63(c)(2) is amended 
     to read as follows:
       ``(C) $3,000 in the case of an individual who is not--
       ``(i) a married individual filing a joint return or a 
     separate return,
       ``(ii) a surviving spouse, or
       ``(iii) a head of household, or''.
       (d) Clerical Amendment.--The table of sections for subpart 
     B of part II of subchapter A of chapter 61 is amended by 
     inserting after the item relating to section 6013 the 
     following:

``Sec. 6013A. Combined return with separate rates.''.

       (e) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1998.

     SEC. 3. INCOME TAXED AT LOWEST RATE INCREASED TO $35,000 FOR 
                   UNMARRIED INDIVIDUALS, $40,000 FOR HEADS OF 
                   HOUSEHOLDS, AND $50,000 FOR JOINT RETURNS AND 
                   SURVIVING SPOUSES.

       (a) General Rule.--Section 1 (relating to tax imposed) is 
     amended by striking subsections (a) through (e) and inserting 
     the following:
       ``(a) Married Individuals Filing Joint Returns and 
     Surviving Spouses.--There is hereby imposed on the taxable 
     income of--
       ``(1) every married individual (as defined in section 7703) 
     who makes a single return jointly with his spouse under 
     section 6013, and
       ``(2) every surviving spouse (as defined in section 2(a)),

     a tax determined in accordance with the following table:

The tax is:e income is:
15% of taxable income..................................................
$7,500, plus 28% of the excess over $50,000............................
$24,286, plus 31% of the excess over $109,950..........................
$38,546, plus 36% of the excess over $155,950..........................
$82,646, plus 39.6% of the excess over $278,450........................

       ``(b) Heads of Households.--There is hereby imposed on the 
     taxable income of every head of a household (as defined in 
     section 2(b)) a tax determined in accordance with the 
     following table:

The tax is:e income is:
15% of taxable income..................................................
$6,000, plus 28% of the excess over $40,000............................
$21,050, plus 31% of the excess over $93,750...........................
$36,007, plus 36% of the excess over $142,000..........................
$85,129 plus 39.6% of the excess over $278,450.........................

       ``(c) Separate or Unmarried Return Rate.--There is hereby 
     imposed on the taxable income of every individual (other than 
     a married individual (as defined in section 7703) filing a 
     joint return or a separate return, a surviving spouse as 
     defined in section 2(a), or a head of household as defined in 
     section 2(b)) a tax determined in accordance with the 
     following table:

The tax is:e income is:
15% of taxable income..................................................
$5,250, plus 28% of the excess over $35,000............................
$15,344, plus 31% of the excess over $71,050...........................
$33,029, plus 36% of the excess over $128,100..........................
$87,155, plus 39.6% of the excess over $278,450........................

       ``(d) Married Individuals Filing Separate Returns.--There 
     is hereby imposed on the taxable income of every married 
     individual (as defined in section 7703) who does not make a 
     single return jointly with his spouse under section 6013, a 
     tax determined in accordance with the following table:

The tax is:e income is:
15% of taxable income..................................................
$3,750, plus 28% of the excess over $25,000............................
$12,143, plus 31% of the excess over $54,975...........................
$19,273, plus 36% of the excess over $77,975...........................
$41,323, plus 39.6% of the excess over $139,225........................

       ``(e) Estates and Trusts.--There is hereby imposed on the 
     taxable income of--
       ``(1) every estate, and
       ``(2) every trust,

     taxable under this subsection a tax determined in accordance 
     with the following table:

The tax is:e income is:
15% of taxable income..................................................
$255, plus 28% of the excess over $1,700...............................
$899, plus 31% of the excess over $4,000...............................
$1,550, plus 36% of the excess over $6,100.............................
$2,360, plus 39.6% of the excess over $8,350.''........................

       (b) Inflation Adjustment To Apply in Determining Rates for 
     1999.--Subsection (f) of section 1 is amended--
       (1) by striking ``1993'' in paragraph (1) and inserting 
     ``1998'',
       (2) by striking ``1992'' in paragraph (3)(B) and inserting 
     ``1997'', and
       (3) by striking paragraph (7).
       (c) Conforming Amendments.--
       (1) The following provisions are each amended by striking 
     ``1992'' and inserting ``1997'' each place it appears:
       (A) Section 25A(h).
       (B) Section 32(j)(1)(B).
       (C) Section 41(e)(5)(C).
       (D) Section 42(h)(6)(G)(i)(II).
       (E) Section 68(b)(2)(B).
       (F) Section 135(b)(2)(B)(ii).
       (G) Section 151(d)(4).
       (H) Section 221(g)(1)(B).
       (I) Section 512(d)(2)(B).
       (J) Section 513(h)(2)(C)(ii).
       (K) Section 877(a)(2).
       (L) Section 911(b)(2)(D)(ii)(II).
       (M) Section 4001(e)(1)(B).
       (N) Section 4261(e)(4)(A)(ii).
       (O) Section 6039F(d).
       (P) Section 6334(g)(1)(B).
       (Q) Section 7430(c)(1).
       (2) Subparagraph (B) of section 59(j)(2) is amended by 
     striking ``, determined by substituting `1997' for `1992' in 
     subparagraph (B) thereof''.
       (3) Subparagraph (B) of section 63(c)(4) is amended by 
     striking ``by substituting for'' and all that follows and 
     inserting ``by substituting for `calendar year 1997' in 
     subparagraph (B) thereof `calendar year 1987' in the case of 
     the dollar amounts contained in paragraph (2) or (5)(A) or 
     subsection (f).''.
       (4) Subparagraph (B) of section 132(f)(6) is amended by 
     inserting before the period ``, determined by substituting 
     `calendar year 1992' for `calendar year 1997' in subparagraph 
     (B) thereof''.
       (5) Paragraph (2) of section 220(g) is amended by striking 
     `` by substituting `calendar year 1997' for `calendar year 
     1992' in subparagraph (B) thereof''.
       (6) Subparagraph (B) of section 685(c)(3) is amended by 
     striking ``, by substituting `calendar year 1997' for 
     `calendar year 1992' in subparagraph (B) thereof''.
       (7) Subparagraph (B) of section 2032A(a)(3) is amended by 
     striking ``by substituting `calendar year 1997' for `calendar 
     year 1992' in subparagraph (B) thereof''.

[[Page S1439]]

       (8) Subparagraph (B) of section 2503(b)(2) is amended by 
     striking ``by substituting `calendar year 1997' for `calendar 
     year 1992' in subparagraph (B) thereof''.
       (9) Paragraph (2) of section 2631(c) is amended by striking 
     ``by substituting `calendar year 1997' for `calendar year 
     1992' in subparagraph (B) thereof''.
       (10) Subparagraph (B) of 6601(j)(3) is amended by striking 
     ``by substituting `calendar year 1997' for `calendar year 
     1992' in subparagraph (B) thereof''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1998.

     SEC. 4. 1-YEAR HOLDING PERIOD FOR ANY LONG-TERM CAPITAL GAIN.

       (a) In General.--Section 1(h)(4) (defining adjusted net 
     capital gain) is amended by adding ``and'' at the end of 
     subparagraph (B), by striking ``, and'' at the end of 
     subparagraph (C) and inserting a period, and by striking 
     subparagraph (D).
       (b) Conforming Amendments.--Section 1(h) is amended--
       (1) in paragraph (6), by striking subparagraph (A) and 
     inserting the following:
       ``(A) In general.--The term `unrecaptured section 1250 
     gain' means the amount of long-term capital gain which would 
     be treated as ordinary income if section 1250(b)(1) included 
     all depreciation and the applicable percentage under section 
     1250(a) were 100 percent.'',
       (2) by striking paragraphs (8), (10), and (11),
       (3) in paragraph (9), by striking ``section 1202 gain, or 
     mid-term gain'' and inserting ``or section 1202 gain'',
       (4) by redesignating paragraph (9) as paragraph (8), and
       (5) by adding at the end the following:
       ``(8) Treatment of pass-thru entities.--
       ``(A) In general.--The Secretary may prescribe such 
     regulations as are appropriate (including regulations 
     requiring reporting) to apply this subsection in the case of 
     sales and exchanges by pass-thru entities and of interests in 
     such entities.
       ``(B) Pass-thru entity defined.--For purposes of 
     subparagraph (A), the term `pass-thru entity' means--
       ``(i) a regulated investment company,
       ``(ii) a real estate investment trust,
       ``(iii) an S corporation,
       ``(iv) a partnership,
       ``(v) an estate or trust, and
       ``(vi) a common trust fund.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1998.

     SEC. 5. INDEXING OF CERTAIN ASSETS FOR PURPOSES OF 
                   DETERMINING GAIN OR LOSS.

       (a) In General.--Part II of subchapter O of chapter 1 
     (relating to basis rules of general application) is amended 
     by inserting after section 1021 the following new section:

     ``SEC. 1022. INDEXING OF CERTAIN ASSETS FOR PURPOSES OF 
                   DETERMINING GAIN OR LOSS.

       ``(a) General Rule.--
       ``(1) Indexed basis substituted for adjusted basis.--Except 
     as provided in paragraph (2), if an indexed asset which has 
     been held for more than 1 year is sold or otherwise disposed 
     of, then, for purposes of this title, the indexed basis of 
     the asset shall be substituted for its adjusted basis.
       ``(2) Exception for depreciation, etc.--The deduction for 
     depreciation, depletion, and amortization shall be determined 
     without regard to the application of paragraph (1) to the 
     taxpayer or any other person.
       ``(b) Indexed Asset.--
       ``(1) In general.--For purposes of this section, the term 
     `indexed asset' means--
       ``(A) stock in a corporation, and
       ``(B) tangible property (or any interest therein), which is 
     a capital asset or property used in the trade or business (as 
     defined in section 1231(b)).
       ``(2) Certain property excluded.--For purposes of this 
     section, the term `indexed asset' does not include--
       ``(A) Creditor's interest.--Any interest in property which 
     is in the nature of a creditor's interest.
       ``(B) Options.--Any option or other right to acquire an 
     interest in property.
       ``(C) Net lease property.--In the case of a lessor, net 
     lease property (within the meaning of subsection (h)(1)).
       ``(D) Certain preferred stock.--Stock which is preferred as 
     to dividends and does not participate in corporate growth to 
     any significant extent.
       ``(E) Stock in certain corporations.--Stock in--
       ``(i) an S corporation (within the meaning of section 
     1361),
       ``(ii) a personal holding company (as defined in section 
     542), and
       ``(iii) a foreign corporation.
       ``(3) Exception for stock in foreign corporation which is 
     regularly traded on national or regional exchange.--Clause 
     (iii) of paragraph (2)(E) shall not apply to stock in a 
     foreign corporation the stock of which is listed on the New 
     York Stock Exchange, the American Stock Exchange, or any 
     domestic regional exchange for which quotations are published 
     on a regular basis other than--
       ``(A) stock of a foreign investment company (within the 
     meaning of section 1246(b)), and
       ``(B) stock in a foreign corporation held by a United 
     States person who meets the requirements of section 
     1248(a)(2).
       ``(c) Indexed Basis.--For purposes of this section--
       ``(1) General rule.--The indexed basis for any asset is--
       ``(A) the adjusted basis of the asset, increased by
       ``(B) the applicable inflation adjustment.
       ``(2) Applicable inflation adjustment.--The applicable 
     inflation adjustment for any asset is an amount equal to--
       ``(A) the adjusted basis of the asset, multiplied by
       ``(B) the percentage (if any) by which--
       ``(i) the chain-type price index for GDP for the last 
     calendar quarter ending before the asset is disposed of, 
     exceeds
       ``(ii) the chain-type price index for GDP for the last 
     calendar quarter ending before the asset was acquired by the 
     taxpayer.

     The percentage under subparagraph (B) shall be rounded to the 
     nearest \1/10\ of 1 percentage point.
       ``(3) Chain-type price index for GDP.--The chain-type price 
     index for GDP for any calendar quarter is such index for such 
     quarter (as shown in the last revision thereof released by 
     the Secretary of Commerce before the close of the following 
     calendar quarter).
       ``(d) Special Rules.--For purposes of this section--
       ``(1) Treatment as separate asset.--In the case of any 
     asset, the following shall be treated as a separate asset:
       ``(A) a substantial improvement to property,
       ``(B) in the case of stock of a corporation, a substantial 
     contribution to capital, and
       ``(C) any other portion of an asset to the extent that 
     separate treatment of such portion is appropriate to carry 
     out the purposes of this section.
       ``(2) Assets which are not indexed assets throughout 
     holding period.--
       ``(A) In general.--The applicable inflation ratio shall be 
     appropriately reduced for calendar months at any time during 
     which the asset was not an indexed asset.
       ``(B) Certain short sales.--For purposes of applying 
     subparagraph (A), an asset shall be treated as not an indexed 
     asset for any short sale period during which the taxpayer or 
     the taxpayer's spouse sells short property substantially 
     identical to the asset. For purposes of the preceding 
     sentence, the short sale period begins on the day after the 
     substantially identical property is sold and ends on the 
     closing date for the sale.
       ``(3) Treatment of certain distributions.--A distribution 
     with respect to stock in a corporation which is not a 
     dividend shall be treated as a disposition.
       ``(4) Section cannot increase ordinary loss.--To the extent 
     that (but for this paragraph) this section would create or 
     increase a net ordinary loss to which section 1231(a)(2) 
     applies or an ordinary loss to which any other provision of 
     this title applies, such provision shall not apply. The 
     taxpayer shall be treated as having a long-term capital loss 
     in an amount equal to the amount of the ordinary loss to 
     which the preceding sentence applies.
       ``(5) Acquisition date where there has been prior 
     application of subsection (a)(1) with respect to the 
     taxpayer.--If there has been a prior application of 
     subsection (a)(1) to an asset while such asset was held by 
     the taxpayer, the date of acquisition of such asset by the 
     taxpayer shall be treated as not earlier than the date of the 
     most recent such prior application.
       ``(6) Collapsible corporations.--The application of section 
     341(a) (relating to collapsible corporations) shall be 
     determined without regard to this section.
       ``(e) Certain Conduit Entities.--
       ``(1) Regulated investment companies; real estate 
     investment trusts; common trust funds.--
       ``(A) In general.--Stock in a qualified investment entity 
     shall be an indexed asset for any calendar month in the same 
     ratio as the fair market value of the assets held by such 
     entity at the close of such month which are indexed assets 
     bears to the fair market value of all assets of such entity 
     at the close of such month.
       ``(B) Ratio of 90 percent or more.--If the ratio for any 
     calendar month determined under subparagraph (A) would (but 
     for this subparagraph) be 90 percent or more, such ratio for 
     such month shall be 100 percent.
       ``(C) Ratio of 10 percent or less.--If the ratio for any 
     calendar month determined under subparagraph (A) would (but 
     for this subparagraph) be 10 percent or less, such ratio for 
     such month shall be zero.
       ``(D) Valuation of assets in case of real estate investment 
     trusts.--Nothing in this paragraph shall require a real 
     estate investment trust to value its assets more frequently 
     than once each 36 months (except where such trust ceases to 
     exist). The ratio under subparagraph (A) for any calendar 
     month for which there is no valuation shall be the trustee's 
     good faith judgment as to such valuation.
       ``(E) Qualified investment entity.--For purposes of this 
     paragraph, the term `qualified investment entity' means--
       ``(i) a regulated investment company (within the meaning of 
     section 851),
       ``(ii) a real estate investment trust (within the meaning 
     of section 856), and
       ``(iii) a common trust fund (within the meaning of section 
     584).
       ``(2) Partnerships.--In the case of a partnership, the 
     adjustment made under subsection (a) at the partnership level 
     shall be passed through to the partners.
       ``(3) Subchapter s corporations.--In the case of an 
     electing small business corporation, the adjustment under 
     subsection (a) at the corporate level shall be passed through 
     to the shareholders.
       ``(f) Dispositions Between Related Persons.--

[[Page S1440]]

       ``(1) In general.--This section shall not apply to any sale 
     or other disposition of property between related persons 
     except to the extent that the basis of such property in the 
     hands of the transferee is a substituted basis.
       ``(2) Related persons defined.--For purposes of this 
     section, the term `related persons' means--
       ``(A) persons bearing a relationship set forth in section 
     267(b), and
       ``(B) persons treated as single employer under subsection 
     (b) or (c) of section 414.
       ``(g) Transfers To Increase Indexing Adjustment or 
     Depreciation Allowance.--If any person transfers cash, debt, 
     or any other property to another person and the principal 
     purpose of such transfer is--
       ``(1) to secure or increase an adjustment under subsection 
     (a), or
       ``(2) to increase (by reason of an adjustment under 
     subsection (a)) a deduction for depreciation, depletion, or 
     amortization,

     the Secretary may disallow part or all of such adjustment or 
     increase.
       ``(h) Definitions.--For purposes of this section--
       ``(1) Net lease property defined.--The term `net lease 
     property' means leased real property where--
       ``(A) the term of the lease (taking into account options to 
     renew) was 50 percent or more of the useful life of the 
     property, and
       ``(B) for the period of the lease, the sum of the 
     deductions with respect to such property which are allowable 
     to the lessor solely by reason of section 162 (other than 
     rents and reimbursed amounts with respect to such property) 
     is 15 percent or less of the rental income produced by such 
     property.
       ``(2) Stock includes interest in common trust fund.--The 
     term `stock in a corporation' includes any interest in a 
     common trust fund (as defined in section 584(a)).
       ``(i) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the purposes of this section.''.
       (b) Clerical Amendment.--The table of sections for part II 
     of subchapter O of chapter 1 is amended by inserting after 
     the item relating to section 1021 the following new item:

``Sec. 1022. Indexing of certain assets for purposes of determining 
              gain or loss.''.

       (c) Adjustment To Apply for Purposes of Determining 
     Earnings and Profits.--Subsection (f) of section 312 
     (relating to effect on earnings and profits of gain or loss 
     and of receipt of tax-free distributions) is amended by 
     adding at the end thereof the following new paragraph:
       ``(3) Effect on earnings and profits of indexed basis.--

  For substitution of indexed basis for adjusted basis in the case of 
the disposition of certain assets after December 31, 1998, see section 
1022(a)(1).''.

       (d) Effective Dates.--
       (1) In general.--The amendments made by this section shall 
     apply to the disposition of any property the holding period 
     of which begins after December 31, 1998.
       (2) Certain transactions between related persons.--The 
     amendments made by this section shall not apply to the 
     disposition of any property acquired after December 31, 1998, 
     from a related person (as defined in section 1022(f)(2) of 
     the Internal Revenue Code of 1986, as added by this section) 
     if--
       (A) such property was so acquired for a price less than the 
     property's fair market value, and
       (B) the amendments made by this section did not apply to 
     such property in the hands of such related person.

     SEC. 6. REDUCTION OF TOP ESTATE TAX RATE FROM 55 TO 28 
                   PERCENT.

       (a) In General.--Section 2001(c) (relating to imposition 
     and rate of tax) is amended to read as follows:
       ``(c) Rate Schedule.--

``If the amount with respect to which the tentative tax to be computed 
    is:

The tentative tax is:
18 percent of such amount..............................................
$1,800 plus 20 percent of the excess of such amount over $10,000.......
$3,800 plus 22 percent of the excess of such amount over $20,000.......
$8,200 plus 24 percent of the excess of such amount over $40,000.......
$13,000 plus 26 percent of the excess of such amount over $60,000......
$18,200 plus 28 percent of the excess of such amount over $80,000.''...

       (b) Effective Date.--The amendment made by this section 
     shall apply to the estates of decedents dying, and gifts 
     made, after December 31, 1998.

     SEC. 7. REVENUE EFFECT OF ACT NOT TO EXCEED 50 PERCENT OF 
                   FEDERAL BUDGET SURPLUS.

       Not later than 90 days after the date of enactment of this 
     Act, if the Secretary of the Treasury determines that in any 
     of the 4 succeeding fiscal years the amendments made by this 
     Act will result in a reduction of the estimated revenues 
     received in the Treasury for such fiscal year in an amount in 
     excess of 50 percent of the estimated Federal unified budget 
     surplus (if any) for such year (determined without regard to 
     such amendments), the Secretary shall submit to the Committee 
     on Ways and Means of the House of Representatives and the 
     Committee on Finance of the Senate a legislative proposal to 
     appropriately modify the provisions of the Internal Revenue 
     Code of 1986 affected by such amendments to eliminate such 
     excess amount. Any legislation enacted for the purpose of 
     achieving the revenue effect of such legislative proposal 
     submitted pursuant to this subsection shall appropriately 
     identify such purpose.
                                 ______