To amend the Internal Revenue Code of 1986 to eliminate the tax on the net capital gain of taxpayers other than corporations, to exclude interest and dividends from gross income, and to repeal the 1993 income tax increase on Social Security benefits.

Summary: Amends the Internal Revenue Code to exclude from individual gross income: (1) net capital gains; and (2) interest and dividends, not including dividends from farmers' cooperative associations, regulated investment companies and real estate investment trusts, and employee stock ownership plans.Repeals the 85 percent (second tier) taxation of Social Security and Railroad Retirement benefits. Transfers from the general fund in the Treasury to the Hospital Insurance Trust Fund amounts equal to the resultant reduction in revenues.

SECTION 1. EXCLUSION OF NET CAPITAL GAIN OF TAXPAYERS OTHER THAN 
              CORPORATIONS.

    (a) In General.--Part I of subchapter P of chapter 1 of the 
Internal Revenue Code of 1986 (relating to treatment of capital gains) 
is amended by adding at the end the following new section:

``SEC. 1203. EXCLUSION OF NET CAPITAL GAIN OF TAXPAYERS OTHER THAN 
              CORPORATIONS.

    ``In the case of a taxpayer other than a corporation, gross income 
shall not include an amount equal to the net capital gain of the 
taxpayer for the taxable year.''
    (b) Conforming Amendments.--
            (1) Section 1 of such Code is amended by striking 
        subsection (h).
            (2) Subsection (b) of section 55 of such Code is amended by 
        striking paragraph (3).
            (3) Section 1222 of such Code is amended by adding at the 
        end the following new sentence:
``Determinations under this section shall be made before the 
application of section 1203.''
            (4) The table of sections for part I of subchapter P of 
        chapter 1 of such Code is amended by adding at the end the 
        following new item:

                              ``Sec. 1203. Exclusion of net capital 
                                        gain of taxpayers other than 
                                        corporations.''
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

SEC. 2. EXCLUSION INTEREST AND DIVIDEND INCOME FROM TAX.

    (a) In General.--Part III of subchapter B of chapter 1 of the 
Internal Revenue Code of 1986 (relating to amounts specifically 
excluded from gross income) is amended by inserting after section 115 
the following new section:

``SEC. 116. EXCLUSION OF DIVIDENDS AND INTEREST RECEIVED BY 
              INDIVIDUALS.

    ``(a) Exclusion From Gross Income.--Gross income does not include 
dividends and interest otherwise includible in gross income which are 
received during the taxable year by an individual.
    ``(b) Certain Dividends Excluded.--Subsection (a) shall not apply 
to any dividend from a corporation which for the taxable year of the 
corporation in which the distribution is made is a corporation exempt 
from tax under section 521 (relating to farmers' cooperative 
associations).
    ``(c) Special Rules.--For purposes of this section--
            ``(1) Exclusion not to apply to capital gain dividends from 
        regulated investment companies and real estate investment 
        trusts.--

                                ``For treatment of capital gain 
dividends, see sections 854(a) and 857(c).
            ``(2) Certain nonresident aliens ineligible for 
        exclusion.--In the case of a nonresident alien individual, 
        subsection (a) shall apply only in determining the taxes 
        imposed for the taxable year pursuant to sections 871(b)(1) and 
        877(b).
            ``(3) Dividends from employee stock ownership plans.--
        Subsection (a) shall not apply to any dividend described in 
        section 404(k).''.
    (b) Conforming Amendments.--
            (1) Subparagraph (C) of section 32(c)(5) of such Code is 
        amended by striking ``or'' at the end of clause (i), by 
        striking the period at the end of clause (ii) and inserting ``; 
        or'', and by inserting after clause (ii) the following new 
        clause:
                            ``(iii) interest and dividends received 
                        during the taxable year which are excluded from 
                        gross income under section 116.''.
            (2) Subparagraph (A) of section 32(i)(2) of such Code is 
        amended by inserting ``(determined without regard to section 
        116)'' before the comma.
            (3) Subparagraph (B) of section 86(b)(2) of such Code is 
        amended to read as follows:
                    ``(B) increased by the sum of--
                            ``(i) the amount of interest received or 
                        accrued by the taxpayer during the taxable year 
                        which is exempt from tax, and
                            ``(ii) the amount of interest and dividends 
                        received during the taxable year which are 
                        excluded from gross income under section 
                        116.''.
            (4) Subsection (d) of section 135 of such Code is amended 
        by redesignating paragraph (4) as paragraph (5) and by 
        inserting after paragraph (3) the following new paragraph:
            ``(4) Coordination with section 116.--This section shall be 
        applied before section 116.''.
            (5) Paragraph (2) of section 265(a) of such Code is amended 
        by inserting before the period ``, or to purchase or carry 
        obligations or shares, or to make deposits, to the extent the 
        interest thereon is excludable from gross income under section 
        116''.
            (6) Subsection (c) of section 584 of such Code is amended 
        by adding at the end the following new flush sentence:
``The proportionate share of each participant in the amount of 
dividends or interest received by the common trust fund and to which 
section 116 applies shall be considered for purposes of such section as 
having been received by such participant.''.
            (7) Subsection (a) of section 643 of such Code is amended 
        by redesignating paragraph (7) as paragraph (8) and by 
        inserting after paragraph (6) the following new paragraph:
            ``(7) Dividends or interest.--There shall be included the 
        amount of any dividends or interest excluded from gross income 
        pursuant to section 116.''.
            (8) Section 854(a) of such Code is amended by inserting 
        ``section 116 (relating to exclusion of dividends and interest 
        received by individuals) and'' after ``For purposes of''.
            (9) Section 857(c) of such Code is amended to read as 
        follows:
    ``(c) Restrictions Applicable to Dividends Received From Real 
Estate Investment Trusts.--
            ``(1) Treatment for section 116.--For purposes of section 
        116 (relating to exclusion of dividends and interest received 
        by individuals), a capital gain dividend (as defined in 
        subsection (b)(3)(C)) received from a real estate investment 
        trust which meets the requirements of this part shall not be 
        considered as a dividend.
            ``(2) Treatment for section 243.--For purposes of section 
        243 (relating to deductions for dividends received by 
        corporations), a dividend received from a real estate 
        investment trust which meets the requirements of this part 
        shall not be considered as a dividend.''.
            (10) The table of sections for part III of subchapter B of 
        chapter 1 of such Code is amended by inserting after the item 
        relating to section 115 the following new item:

                              ``Sec. 116. Exclusion of dividends and 
                                        interest received by 
                                        individuals.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

SEC. 3. REPEAL OF 1993 INCOME TAX INCREASE ON SOCIAL SECURITY BENEFITS.

    (a) Restoration of Prior Law Formula.--Subsection (a) of section 86 
of the Internal Revenue Code of 1986 is amended to read as follows:
    ``(a) In General.--Gross income for the taxable year of any 
taxpayer described in subsection (b) (notwithstanding section 207 of 
the Social Security Act) includes Social Security benefits in an amount 
equal to the lesser of--
            ``(1) one-half of the Social Security benefits received 
        during the taxable year, or
            ``(2) one-half of the excess described in subsection 
        (b)(1).''
    (b) Repeal of Adjusted Base Amount.--Subsection (c) of section 86 
of such Code is amended to read as follows:
    ``(c) Base Amount.--For purposes of this section, the term `base 
amount' means--
            ``(1) except as otherwise provided in this subsection, 
        $25,000,
            ``(2) $32,000 in the case of a joint return, and
            ``(3) zero in the case of a taxpayer who--
                    ``(A) is married as of the close of the taxable 
                year (within the meaning of section 7703) but does not 
                file a joint return for such year, and
                    ``(B) does not live apart from his spouse at all 
                times during the taxable year.''
    (c) Conforming Amendments.--
            (1) Subparagraph (A) of section 871(a)(3) of such Code is 
        amended by striking ``85 percent'' and inserting ``50 
        percent''.
            (2)(A) Subparagraph (A) of section 121(e)(1) of the Social 
        Security Amendments of 1983 (Public Law 98-21) is amended--
                    (i) by striking ``(A) There'' and inserting 
                ``There'';
                    (ii) by striking ``(i)'' immediately following 
                ``amounts equivalent to''; and
                    (iii) by striking ``, less (ii)'' and all that 
                follows and inserting a period.
            (B) Paragraph (1) of section 121(e) of such Act is amended 
        by striking subparagraph (B).
            (C) Paragraph (3) of section 121(e) of such Act is amended 
        by striking subparagraph (B) and by redesignating subparagraph 
        (C) as subparagraph (B).
            (D) Paragraph (2) of section 121(e) of such Act is amended 
        in the first sentence by striking ``paragraph (1)(A)'' and 
        inserting ``paragraph (1)''.
    (d) Effective Dates.--
            (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall apply to 
        taxable years beginning after December 31, 2002.
            (2) Subsection (c)(1).--The amendment made by subsection 
        (c)(1) shall apply to benefits paid after December 31, 2002.
            (3) Subsection (c)(2).--The amendments made by subsection 
        (c)(2) shall apply to tax liabilities for taxable years 
        beginning after December 31, 2002.
    (e) Maintenance of Transfers to Hospital Insurance Trust Fund.--
            (1) In general.--There are hereby appropriated to the 
        Hospital Insurance Trust Fund established under section 1817 of 
        the Social Security Act amounts equal to the reduction in 
        revenues to the Treasury by reason of the enactment of this 
        section. Amounts appropriated by the preceding sentence shall 
        be transferred from the general fund at such times and in such 
        manner as to replicate to the extent possible the transfers 
        which would have occurred to such Trust Fund had this Act not 
        been enacted.
            (2) Reports.--The Secretary of the Treasury or the 
        Secretary's delegate shall annually report to the Committee on 
        Ways and Means of the House of Representatives and the 
        Committee on Finance of the Senate the amounts and timing of 
        the transfers under this section.