II

104TH CONGRESS

1ST SESSION S. 488

To amend the Internal Revenue Code of 1986 to impose a flat tax only

on the earned income of individuals and the business taxable income

of corporations, and for other purposes.

IN THE SENATE OF THE UNITED STATES

MARCH 2 (legislative day, FEBRUARY 22), 1995

Mr. SPECTER introduced the following bill; which was read twice and referred

to the Committee on Finance

A BILL

To amend the Internal Revenue Code of 1986 to impose

a flat tax only on the earned income of individuals and

the business taxable income of corporations, and for

other purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. INDIVIDUALS TAXED ONLY ON EARNED IN4 COME.

5 (a) IN GENERAL.—Section 1 of the Internal Revenue

6 Code of 1986 is amended to read as follows:
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1 ‘‘SECTION 1. TAX IMPOSED.

2 ‘‘(a) IMPOSITION OF TAX.—There is hereby imposed

3 on the income of every individual a tax equal to 20 percent

4 of the excess (if any) of—

5 ‘‘(1) the taxable earned income received or ac6 crued during the taxable year, over

7 ‘‘(2) the standard deduction (as defined in sec8 tion 63) for such taxable year.

9 ‘‘(b) TAXABLE EARNED INCOME.—For purposes of

10 this section, the term ‘taxable earned income’ means the

11 excess (if any) of earned income (as defined in section

12 911(d)(2)) over the foreign earned income (as defined in

13 section 911(b)(1)).’’

14 (b) INCREASE IN STANDARD DEDUCTION.—Section

15 63 of such Code is amended to read as follows:

16 ‘‘SEC. 63. STANDARD DEDUCTION.

17 ‘‘(a) IN GENERAL.—For purposes of this subtitle, the

18 term ‘standard deduction’ means the sum of—

19 ‘‘(1) the basic standard deduction, plus

20 ‘‘(2) the additional standard deduction.

21 ‘‘(b) BASIC STANDARD DEDUCTION.—For purposes

22 of subsection (a), the basic standard deduction is—

23 ‘‘(1) $16,500 in the case of—

24 ‘‘(A) a joint return, and

25 ‘‘(B) a surviving spouse (as defined in sec26 tion 2(a)),
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1 ‘‘(2) $14,000 in the case of a head of household

2 (as defined in section 2(b)), and

3 ‘‘(3) $9,500 in the case of an individual—

4 ‘‘(A) who is not married and who is not a

5 surviving spouse or head of household, or

6 ‘‘(B) who is a married individual filing a

7 separate return.

8 ‘‘(c) ADDITIONAL STANDARD DEDUCTION.—For pur9 poses of subsection (a), the additional standard deduction

10 is $4,500 for each dependent (as defined in section 152)

11 described in section 151(c)(1) for the taxable year.

12 ‘‘(d) INFLATION ADJUSTMENT.—

13 ‘‘(1) IN GENERAL.—In the case of any taxable

14 year beginning in a calendar year after 1995, each

15 dollar amount contained in subsections (b) and (c)

16 shall be increased by an amount equal to—

17 ‘‘(A) such dollar amount, multiplied by

18 ‘‘(B) the cost-of-living adjustment under

19 section 1(f)(3) for the calendar year in which

20 the taxable year begins, determined by sub21 stituting ‘calendar year 1994’ for ‘calendar year

22 1992’ in subparagraph (B) of such section.

23 ‘‘(2) ROUNDING.—If any increase determined

24 under paragraph (1) is not a multiple of $50, such
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1 amount shall be rounded to the next lowest multiple

2 of $50.’’

3 SEC. 2. INCOME TAX DEDUCTION FOR CASH CHARITABLE

4 CONTRIBUTIONS.

5 (a) IN GENERAL.—Subsection (a) of section 170 of

6 the Internal Revenue Code of 1986 (relating to charitable,

7 etc., contributions and gifts) is amended—

8 (1) by striking paragraph (1) and inserting the

9 following new paragraph:

10 ‘‘(1) GENERAL RULE.—There shall be allowed

11 as a deduction any charitable contribution (as de12 fined in subsection (c)) not to exceed $2,500

13 ($1,250, in the case of a married individual filing a

14 separate return), payment of which is made within

15 the taxable year.’’, and

16 (2) by striking paragraph (3).

17 (b) CONFORMING AMENDMENTS.—

18 (1) Section 170(b) of the Internal Revenue

19 Code of 1986 is amended by adding at the end the

20 following new paragraph:

21 ‘‘(3) TERMINATION OF SUBSECTION.—This sub22 section shall not apply to taxable years beginning

23 after December 31, 1995.’’
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1 (2) Section 170(c) of such Code is amended by

2 inserting ‘‘of cash or its equivalent’’ after ‘‘means a

3 contribution or gift’’.

4 (3) Subsections (d) and (e) of section 170 of

5 such Code are repealed.

6 (4) Section 170(f) of such Code is amended by

7 striking paragraphs (1) through (7) and by redesig8 nating paragraphs (8) and (9) as paragraphs (1)

9 and (2), respectively.

10 (5) Subsections (h) and (i) of section 170 of

11 such Code are repealed.

12 SEC. 3. LIMITATION OF HOME MORTGAGE DEDUCTION TO

13 ACQUISITION INDEBTEDNESS.

14 Paragraph (3) of section 163(h) of the Internal Reve15 nue Code of 1986 (relating to interest) is amended—

16 (1) by striking subparagraphs (A), (C), and (D)

17 and inserting before subparagraph (B) the following

18 new subparagraph:

19 ‘‘(A) IN GENERAL.—The term ‘qualified

20 residence interest’ means any interest which is

21 paid or accrued during the taxable year on ac22 quisition indebtedness with respect to any quali23 fied residence of the taxpayer. For purposes of

24 the preceding sentence, the determination of

25 whether any property is a qualified residence of
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1 the taxpayer shall be made as of the time the

2 interest is accrued.’’, and

3 (2) by striking ‘‘$1,000,000’’ each place it ap4 pears and ‘‘$500,000’’ in subparagraph (B)(ii) and

5 inserting ‘‘$100,000’’ and ‘‘$50,000’’, respectively.

6 SEC. 4. MODIFICATION OF TAX ON BUSINESS ACTIVITIES.

7 Section 11 of the Internal Revenue Code of 1986 (re8 lating to tax imposed on corporations) is amended to read

9 as follows:

10 ‘‘SEC. 11. TAX IMPOSED ON BUSINESS ACTIVITIES.

11 ‘‘(a) TAX IMPOSED.—There is hereby imposed on

12 every person engaged in a business activity a tax equal

13 to 20 percent of the business taxable income of such per14 son.

15 ‘‘(b) LIABILITY FOR TAX.—The tax imposed by this

16 section shall be paid by the person engaged in the business

17 activity, whether such person is an individual, partnership,

18 corporation, or otherwise.

19 ‘‘(c) BUSINESS TAXABLE INCOME.—

20 ‘‘(1) IN GENERAL.—For purposes of this sec21 tion, the term ‘business taxable income’ means gross

22 active income reduced by the deductions specified in

23 subsection (d).
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1 ‘‘(2) GROSS ACTIVE INCOME.—For purposes of

2 paragraph (1), the term ‘gross active income’ means

3 gross income other than investment income.

4 ‘‘(d) DEDUCTIONS.—

5 ‘‘(1) IN GENERAL.—The deductions specified in

6 this subsection are—

7 ‘‘(A) the cost of business inputs for the

8 business activity,

9 ‘‘(B) the compensation (including contribu10 tions to qualified retirement plans but not in11 cluding other fringe benefits) paid for employ12 ees performing services in such activity, and

13 ‘‘(C) the cost of tangible personal and real

14 property used in such activity.

15 ‘‘(2) BUSINESS INPUTS.—For purposes of sub16 paragraph (A), the term ‘cost of business inputs’

17 means—

18 ‘‘(A) the actual amount paid for goods,

19 services, and materials, whether or not resold

20 during the taxable year,

21 ‘‘(B) the fair market value of business in22 puts brought into the United States, and

23 ‘‘(C) the actual cost, if reasonable, of trav24 el and entertainment expenses for business pur25 poses.
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1 Such term shall not include purchases of goods and

2 services provided to employees or owners.

3 ‘‘(e) CARRYOVER OF EXCESS DEDUCTIONS.—

4 ‘‘(1) IN GENERAL.—If the aggregate deductions

5 for any taxable year exceed the gross active income

6 for such taxable year, the amount of the deductions

7 specified in subsection (d) for the succeeding taxable

8 year (determined without regard to this subsection)

9 shall be increased by the sum of—

10 ‘‘(A) such excess, plus

11 ‘‘(B) the product of such excess and the 3-

12 month Treasury rate for the last month of such

13 taxable year.

14 ‘‘(2) 3-MONTH TREASURY RATE.—For purposes

15 of paragraph (1), the 3-month Treasury rate is the

16 rate determined by the Secretary based on the aver17 age market yield (during any 1-month period se18 lected by the Secretary and ending in the calendar

19 month in which the determination is made) on out20 standing marketable obligations of the United States

21 with remaining periods to maturity of 3 months or

22 less.’’
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1 SEC. 5. EFFECTIVE DATE.

2 The amendments made by this Act shall apply to tax3 able years beginning after December 31, 1995.

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