[Congressional Record Volume 149, Number 59 (Friday, April 11, 2003)]
[Senate]
[Pages S5363-S5370]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. SPECTER:
  S. 907. 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.
  Mr. SPECTER. Madam President, I rise to speak about the subject of 
taxation from a little different perspective, a legislative proposal 
which, if adopted, would add very considerably to productivity in 
America, and that is a proposal for a flat tax. In the fall of 1994, 
Richard Armey of the House of Representatives introduced a flat tax. I 
studied it, then in the spring of 1995, I introduced a flat tax for the 
Senate. That was the first one introduced. I have introduced it in 
successive years.
  I usually pick April 15, because April 15 is tax filing day. But this 
year we are going to be in recess for the spring break. I had thought 
today would be the last day we would be in session. That is open to 
debate at this point. I just came from a conference of the 
Appropriations Committee, and there are a great many unresolved issues. 
I posed the question to my colleagues on the Appropriations Committee: 
What time do we vote on Sunday?
  Some of my colleagues may be listening on C-SPAN2, and that will give 
them a jolt: What time do we vote on Sunday? Or we might not vote as 
early as Sunday. We might pick a time on Monday.
  I got the attention of the clerks, too, by talking about something 
important: When are we going to finish the business of the Senate? The 
distinguished Parliamentarian is nodding his head in chagrin as to what 
is happening here.
  Some suggestions have been floated around the Appropriations 
Committee of a way to solve this impasse between the House and the 
Senate on appropriations, the impasse between the House and the Senate 
on the budget, and that is a constitutional amendment for a unicameral 
legislature. That would be a shocker. For anybody watching C-SPAN2, 
that means one chamber. Then the question would come up: Which chamber 
will it be?
  Nobody is going to go to a unicameral legislature, and I do not know 
when we are going to conclude the business of the Senate. I may be 
offering this flat tax legislation on the wrong day. Perhaps I ought to 
wait, because we may still be here on April 15, which would be next 
Tuesday.
  In all seriousness, we have the most extraordinarily complex system 
for filing taxes ever devised. In the midst of an overwhelming 
bureaucracy and a regulatory system in Washington, DC, nothing compares 
to the Federal tax code.
  The Federal tax code has grown from 744,000 words in 1955 to 6.9 
million words and 17,000 pages at the present time. A study showed that 
more than 13 hours are consumed by the average American--rather, more 
than 13 hours are consumed on average--there is no such thing as an 
average American--on average by taxpayers in filling out the principal 
Form 1040. And if one goes to the various schedules, it can be another 
5\1/2\ hours or 7\1/2\ hours.
  I just finished filling out my tax return, and it is inordinately 
complicated. It is insufficient to be a Philadelphia lawyer to 
understand the Federal tax code, and then the State taxes, and then 
city taxes, the wage tax, the property tax, and the real estate tax. It 
is a nightmare.
  It is possible to change all of that by going to a flat tax, and then 
the tax return would be on a postcard. The wonders of television. 
People can see the postcard. It will take about 15 minutes to fill out 
a postcard, which would identify the individual, specify the total 
compensation, specify the allowance, the number of dependents, and in 
the course of 15 minutes it would be finished.
  This tax would be calculated on a flat rate of 20 percent. It would 
be very beneficial to people at all levels of the income strata except 
for those who engage in tax shelters. The average American today, or in 
the middle income, a family of four, which does not itemize deductions, 
pays taxes on all income over $19,850. Under this flat tax, there would 
be a personal exemption of $27,500 for a family of four, and taxes 
would be paid only over that amount.

[[Page S5364]]

  After having just criticized charts, my staff has brought me a chart 
which they prepared. I certainly would not want to omit the showing of 
this chart. The writing is too small for reading on C-SPAN2, but it 
specifies the identity of the person, the total compensation, the 
personal allowance, and it can be filled out in the course of 15 
minutes.
  A superior depiction, in my opinion, is the postcard. People can deal 
more easily with postcards than they can with charts.
  I have provided for two deductions which I am maintaining, deductions 
on interest and charitable contributions. It may be that ultimately we 
will have a totally flat tax, which would reduce another percent down 
to 19 percent. I have included interest on home mortgages because it is 
so prevalent, and I believe Americans might be very surprised not to be 
able to deduct their interest on home mortgages. That interest on home 
mortgages has been a great stimulus for housing construction and also a 
great encouragement for people to own their own homes. That is very 
important as a societal matter.
  I have also retained the deduction on charitable contributions, which 
remains very important. That was reinforced by the Senate earlier this 
week by providing an increase in charitable contributions deductibility 
looking toward faith-based initiatives.
  What I would like to do most emphatically would be to get the debate 
started. This body, the House, and the Treasury Department have never 
seriously considered a flat tax. It ought to be seriously considered. 
Whether it would be accepted or not would be the outcome of the debate. 
The flat tax proposal which I am bringing to you today, which is 
modeled after the outline by Professor Hall and Professor Rabushka of 
Stanford University, has been very carefully thought through. It is a 
neutral tax scheme. An analysis of people at various income levels 
shows that it is universally beneficial for all except those who engage 
in tax shelters and pay no tax at all.
  The greatest benefit would be the savings to the American people of 
some 5.8 billion hours a year and some $194 billion in preparation 
expenses. I have actually seen estimates on the cost of tax compliance 
as high as $800 billion. Again, these estimates are such that nobody 
really knows, but as lawyers say in litigation, the pain and suffering 
that goes with filing these returns, or the cruel and unusual 
punishment involved in making these computations and the study 
involved, it would be a great relief to the American people. It would 
be win, win, win. There would be great savings in time. There would be 
savings in individual taxes, and there would be a tremendous stimulus 
to the economy so that so many corporations and businesses would no 
longer have to have a special office, which is the practice in many 
places, for the tax collector who comes in to conduct the audit on a 
yearly basis.
  To reiterate, in less than one week, American taxpayers face another 
Federal income tax deadline. The date of April 15 stabs fear, anxiety, 
and unease into the hearts of millions of Americans. Every year during 
``tax season,'' millions of Americans spend their evenings poring over 
page after page of IRS instructions, going through their records 
looking for information, and struggling to find and fill out all the 
appropriate forms on their Federal tax returns. Americans are 
intimidated by the sheer number of different tax forms and their 
instructions, many of which they may be unsure whether they need to 
file. Given the approximately 325 possible forms, not to mention the 
instructions that accompany, simply trying to determine which form to 
file can in itself be a daunting and overwhelming task. According to 
the Tax Foundation, American taxpayers, including businesses, spend 
more than 5.8 billion hours and $194 billion each year in complying 
with tax laws. That works out to more than $2,400 per U.S. household. 
Much of this time is spent burrowing through IRS laws and regulations 
which fill 17,000 pages and have grown from 744,000 words in 1955 to 
over 6.9 million words in 2000. By contrast, the Pledge of Allegiance 
has only 31 words, the Gettysburg Address has 267 words, the 
Declaration of Independence has about 1,300 words, and the Bible has 
only about 1,773,000 words.
  The majority of taxpayers still face filing tax forms that are far 
too complicated and take far too long to complete. According to the 
estimated preparation time listed on the forms by the IRS, the 2002 
Form 1040 is estimated to take 13 hours and 10 minutes to complete. 
Moreover this does not include the estimated time to complete the 
accompanying schedules, such as Schedule A, for itemized deductions, 
which carries an estimated preparation time of 5 hours, 37 minutes, or 
Schedule D, for reporting capital gains and losses, shows an estimated 
preparation time of 7 hours, 35 minutes. Moreover, this complexity is 
getting worse each year. Just from 1998 to 2002 the estimated time to 
prepare Form 1040 jumped 96 minutes.
  It is no wonder that well over half of all taxpayers, 56 percent 
according to a recent survey now hire an outside professional to 
prepare their tax returns for them. However, the fact that only 29 
percent of individuals itemize their deductions shows that a 
significant percentage of our taxpaying population believes that the 
tax system is too complex for them to deal with. We all understand that 
paying taxes will never be something we enjoy, but neither should it be 
cruel and unusual punishment. Further, the pace of change to the 
Internal Revenue Code is brisk--Congress made about 9,500 Tax Code 
changes in the past 12 years. And we are far from being finished. Year 
after year, we continue to ask the same question--is there not a better 
way?
  My flat tax legislation would make filing a tax return a manageable 
chore, not a seemingly endless nightmare, for most taxpayers. My flat 
tax legislation will fundamentally revise the present Tax Code, with 
its myriad rates, deductions, and instructions. This legislation would 
institute a simple, flat 20 percent tax rate for all individuals and 
businesses. 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.
  My flat tax plan would eliminate the kinds of frustrations I have 
outlined above for millions of taxpayers. This flat tax would enable us 
to scrap the great majority of the IRS rules, regulations, and 
instructions and delete most of the 6.9 million words in the Internal 
Revenue Code. Instead of billions of hours of non-productive 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 to engage in productive business activity or 
for more time with their families instead of poring over tax tables, 
schedules, and regulations.
  My flat tax proposal 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:
  A 10-line postcard filing would replace the myriad forms and 
attachments currently required, thus saving Americans up to 5.8 billion 
hours they currently spend every year in tax compliance.
  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 6.9 million words and 17,000 pages currently. It would also 
allow us to slash the mammoth IRS bureaucracy of 117,000 employees.
  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.
  Investment decisions would be made on the basis of productivity 
rather than simply for tax avoidance, thus leading to even greater 
economic expansion.
  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.
  Americans would be able to save up to $194 billion they currently 
spend every year in tax compliance.
  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.

[[Page S5365]]

  Simplification of the tax code will allow us to save significantly on 
the $7 billion annual budget currently allocated to the Internal 
Revenue Service.
  The most dramatic way to show what the flat tax is to consider that 
the income tax form for the flat tax is printed on a postcard--it will 
allow all taxpayers to file their April 15 tax returns on a simple 10-
line postcard. This postcard will take 15 minutes to fill out.
  At my town hall meetings across Pennsylvania, the public support for 
fundamental tax reform is overwhelming. I would point out that in those 
speeches that I never leave home without two key documents: 1, my copy 
of the Constitution; and, 2, a 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.
  This is a win-win situation for America because it lowers the tax 
burden on the taxpayers in the lower brackets. For example in the 2002 
tax year, the standard deduction is $4,700 for a single taxpayer, 
$6,900 for a head of household and $7,850 for a married couple filing 
jointly, while the personal exemption for individuals and dependents is 
$3,000. Thus, under the current tax code, a family of four which does 
not itemize deductions would pay taxes on all income over $19,850--
these are personal exemptions of $12,000 and a standard deduction of 
$7,850. By contrast, under my flat tax bill, that same family would 
receive a personal exemption of $27,500, and would pay tax on only 
income over that amount.
  The tax loopholes enable write-offs to save some $393 billion a year. 
What is eliminated under the flat tax are the loopholes, the deductions 
in this complicated code which can be deciphered, interpreted, and 
found really only by the $500-an-hour lawyers. That money is lost to 
the taxpayers. $120 billion would be saved by the elimination of fraud 
because of the simplicity of the tax code, the taxpayer being able to 
find out exactly what he or she owes.
  This bill is modeled after legislation organized and written by two 
very distinguished professors of law at Stanford University, Professor 
Hall and Professor Rabushka. Their model was first introduced in the 
Congress in the fall of 1994 by Majority Leader Richard Armey. I 
introduced the flat tax bill--the first one in the Senate--on March 2, 
1995, S. 488. 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. I reintroduced this legislation 
in the 105th Congress with slight modifications to reflect inflation-
adjusted increases in the personal allowances and dependent allowances. 
I re-introduced the bill two Congresses ago on April 15, 1999--income 
tax day--in a bill denominated as S. 822. More recently, I introduced 
my flat tax legislation as an amendment to S. 1429, the Tax 
Reconciliation bill. The amendment was not adopted.

  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 the 
study of the complexities of the Tax Code over 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 Operations 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. Einstein himself is quoted as saying ``the hardest thing in the 
world to understand is the income tax.''
  The Hall-Rabushka model envisioned a flat tax with no deductions 
whatever. After considerable reflection, I decided to include in the 
legislation limited deductions for home mortgage interest for up to 
$100,000 in borrowing and charitable contributions up to $2,500. 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 only 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 
percent to 20 percent to accommodate retaining limited home mortgage 
interest and charitable deductions.
  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 raising the 
standard of living for all Americans.
  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.
  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. My flat tax legislation will afford Americans such a tax 
system.
  I ask unanimous consent that the bill, be printed in the Record.

                                 S. 907

       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 2003''.
       (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

[[Page S5366]]

     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--
       ``(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 2004, 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 for the calendar year 
     in which the taxable year begins.
       ``(2) Cost-of-living adjustment.--For purposes of paragraph 
     (1), the cost-of-living adjustment for any calendar year is 
     the percentage (if any) by which--
       ``(A) the CPI for the preceding calendar year, exceeds
       ``(B) the CPI for calendar year 2003.
       ``(3) CPI for any calendar year.--For purposes of paragraph 
     (2), the CPI for any calendar year is the average of the 
     Consumer Price Index as of the close of the 12-month period 
     ending on August 31 of such calendar year.
       ``(4) Consumer price index.--For purposes of paragraph (3), 
     the term `Consumer Price Index' means the last Consumer Price 
     Index for all-urban consumers published by the Department of 
     Labor. For purposes of the preceding sentence, the revision 
     of the Consumer Price Index which is most consistent with the 
     Consumer Price Index for calendar year 1986 shall be used.
       ``(5) Rounding.--If any increase determined under paragraph 
     (1) is not a multiple of $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

[[Page S5367]]

     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 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 (c)(2) shall not apply.
       ``(2) Reduction in $100,000 limitation.--The limitation of 
     subsection (c)(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.

[[Page S5368]]

       ``(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 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--

[[Page S5369]]

       ``(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.

     ``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).


[[Page S5370]]


       ``(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).
       (R) Subchapter W (relating to District of Columbia 
     Enterprise Zone).
       (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 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, 2003.
       (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, 2003.
       (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.
                                 ______