I
105TH CONGRESS
1ST SESSION
H. R. 1040
To promote freedom, fairness, and economic opportunity for families by
reducing the power and reach of the Federal establishment.
IN THE HOUSE OF REPRESENTATIVES
MARCH 12, 1997
Mr. ARMEY introduced the following bill; which was referred to the Committee
on Ways and Means, and in addition to the Committees on Rules, and
the Budget, for a period to be subsequently determined by the Speaker,
in each case for consideration of such provisions as fall within the juris-
diction of the committee concerned
A BILL
To promote freedom, fairness, and economic opportunity for
families by reducing the power and reach of the Federal
establishment.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE; TABLE OF CONTENTS.
(a) SHORT TITLE.—This Act may be cited as the
‘‘Freedom and Fairness Restoration Act of 1997’’.
(b) TABLE OF CONTENTS.—
Sec. 1. Short title; table of contents.
TITLE I—TAX REDUCTION AND SIMPLIFICATION;
SUPERMAJORITY REQUIRED FOR TAX CHANGES
Subtitle A—Tax Reduction and Simplification
Sec. 101. Individual income tax.
Sec. 102. Tax on business activities.
Sec. 103. Simplification of rules relating to qualified retirement plans.
Sec. 104. Repeal of alternative minimum tax.
Sec. 105. Repeal of credits.
Sec. 106. Repeal of estate and gift taxes and obsolete income tax provisions.
Sec. 107. Effective date.
Subtitle B—Supermajority Required for Tax Changes
Sec. 111. Supermajority required.
TITLE II—SPENDING RESTRAINT AND BUDGET PROCESS
REFORM
Subtitle A—Balanced Budget by Fiscal Year 2002
Sec. 201. Maximum spending amounts.
Sec. 202. Enforcing maximum spending sequestration.
Sec. 203. Total spending point of order.
Subtitle B—Zero Based Budgeting and Decennial Sunsetting
Sec. 211. Reauthorization of discretionary programs and unearned entitle-
ments.
Sec. 212. Point of order.
Sec. 213. Decennial sunsetting.
TITLE I—TAX REDUCTION AND
SIMPLIFICATION; 
SUPER-
MAJORITY 
REQUIRED 
FOR
TAX CHANGES
Subtitle A—Tax Reduction and
Simplification
SEC. 101. INDIVIDUAL INCOME TAX.
(a) IN GENERAL.—Section 1 of the Internal Revenue
Code of 1986 is amended to read as follows:
‘‘SECTION 1. TAX IMPOSED.
‘‘There is hereby imposed on the taxable income of
every individual a tax equal to 20 percent (17 percent in
the case of taxable years beginning after December 31,
1998) of the taxable income of such individual for such
taxable year.’’
(b) TAXABLE INCOME.—Section 63 of such Code is
amended to read as follows:
‘‘SEC. 63. TAXABLE INCOME.
‘‘(a) IN GENERAL.—For purposes of this subtitle, the
term ‘taxable income’ means the excess of—
‘‘(1) the sum of—
‘‘(A) wages (as defined in section 3121(a)
without regard to paragraph (1) thereof) which
are paid in cash and which are received during
the taxable year for services performed in the
United States,
‘‘(B) retirement distributions which are in-
cludible in gross income for such taxable year,
plus
‘‘(C) amounts received under any law of
the United States or of any State which is in
the nature of unemployment compensation, over
‘‘(2) the standard deduction.
‘‘(b) STANDARD DEDUCTION.—
‘‘(1) IN GENERAL.—For purposes of this sub-
title, the term ‘standard deduction’ means the sum
of—
‘‘(A) the basic standard deduction, plus
‘‘(B) the additional standard deduction.
‘‘(2) BASIC STANDARD DEDUCTION.—For pur-
poses of paragraph (1), the basic standard deduction
is—
‘‘(A) $22,000 in the case of—
‘‘(i) a joint return, or
‘‘(ii) a surviving spouse (as defined in
section 2(a)),
‘‘(B) $14,400 in the case of a head of
household (as defined in section 2(b)), and
‘‘(C) $11,000 in the case of an individ-
ual—
‘‘(i) who is not married and who is
not a surviving spouse or head of house-
hold, or
‘‘(ii) who is a married individual filing
a separate return.
‘‘(3) ADDITIONAL STANDARD DEDUCTION.—For
purposes of paragraph (1), the additional standard
deduction is $5,000 for each dependent (as defined
in section 152) who is described in section 151(c)(1)
for the taxable year and who is not required to file
a return for such taxable year.
‘‘(c) RETIREMENT DISTRIBUTIONS.—For purposes of
subsection (a), the term ‘retirement distribution’ means
any distribution from—
‘‘(1) a plan described in section 401(a) which
includes a trust exempt from tax under section
501(a),
‘‘(2) an annuity plan described in section
403(a),
‘‘(3) an annuity contract described in section
403(b),
‘‘(4) an individual retirement account described
in section 408(a),
‘‘(5) an individual retirement annuity described
in section 408(b),
‘‘(6) an eligible deferred compensation plan (as
defined in section 457),
‘‘(7) a governmental plan (as defined in section
414(d)), or
‘‘(8) a trust described in section 501(c)(18).
Such term includes any plan, contract, account, annuity,
or trust which, at any time, has been determined by the
Secretary to be such a plan, contract, account, annuity,
or trust.
‘‘(d) INCOME OF CERTAIN CHILDREN.—For purposes
of this subtitle—
‘‘(1) an individual’s taxable income shall include
the taxable income of each dependent child of such
individual who has not attained age 14 as of the
close of such taxable year, and
‘‘(2) such dependent child shall have no liability
for tax imposed by section 1 with respect to such in-
come and shall not be required to file a return for
such taxable year.
‘‘(e) INFLATION ADJUSTMENT.—
‘‘(1) IN GENERAL.—In the case of any taxable
year beginning in a calendar year after 1997, each
dollar amount contained in subsection (b) shall be
increased by an amount determined by the Secretary
to be equal to—
‘‘(A) such dollar amount, multiplied by
‘‘(B) the cost-of-living adjustment for such
calendar year.
‘‘(2) COST-OF-LIVING ADJUSTMENT.—For pur-
poses 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 the calendar year 1996.
‘‘(3) CPI FOR ANY CALENDAR YEAR.—For pur-
poses 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 Au-
gust 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 consist-
ent 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 $10, such
increase shall be rounded to the next highest mul-
tiple of $10.
‘‘(f) MARITAL STATUS.—For purposes of this section,
marital status shall be determined under section 7703.’’
SEC. 102. TAX ON BUSINESS ACTIVITIES.
(a) IN GENERAL.—Section 11 of the Internal Reve-
nue Code of 1986 (relating to tax imposed on corpora-
tions) is amended to read as follows:
‘‘SEC. 11. TAX IMPOSED ON BUSINESS ACTIVITIES.
‘‘(a) TAX IMPOSED.—There is hereby imposed on
every person engaged in a business activity a tax equal
to 20 percent (17 percent in the case of taxable years be-
ginning after December 31, 1998) 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.—For purposes of
this section—
‘‘(1) IN GENERAL.—The term ‘business taxable
income’ means gross active income reduced by the
deductions specified in subsection (d).
‘‘(2) GROSS ACTIVE INCOME.—
‘‘(A) IN GENERAL.—For purposes of para-
graph (1), the term ‘gross active income’ means
gross receipts from—
‘‘(i) the sale or exchange of property
or services in the United States by any
person in connection with a business activ-
ity, and
‘‘(ii) the export of property or services
from the United States in connection with
a business activity.
‘‘(B) EXCHANGES.—For purposes of this
section, the amount treated as gross receipts
from the exchange of property or services is the
fair market value of the property or services re-
ceived, plus any money received.
‘‘(C) COORDINATION WITH SPECIAL RULES
FOR
FINANCIAL
SERVICES, ETC.—Except as
provided in subsection (e)—
‘‘(i) the term ‘property’ does not in-
clude money or any financial instrument,
and
‘‘(ii) the term ‘services’ does not in-
clude financial services.
‘‘(3) EXEMPTION FROM TAX FOR ACTIVITIES OF
GOVERNMENTAL ENTITIES AND TAX-EXEMPT ORGA-
NIZATIONS.—For purposes of this section, the term
‘business activity’ does not include any activity of a
governmental entity or of any other organization
which is exempt from tax under this chapter.
‘‘(d) DEDUCTIONS.—
‘‘(1) IN GENERAL.—The deductions specified in
this subsection are—
‘‘(A) the cost of business inputs for the
business activity,
‘‘(B) wages (as defined in section 3121(a)
without regard to paragraph (1) thereof) which
are paid in cash for services performed in the
United States as an employee, and
‘‘(C) retirement contributions to or under
any plan or arrangement which makes retire-
ment distributions (as defined in section 63(c))
for the benefit of such employees to the extent
such contributions are allowed as a deduction
under section 404.
‘‘(2) BUSINESS INPUTS.—
‘‘(A) IN GENERAL.—For purposes of para-
graph (1), the term ‘cost of business inputs’
means—
‘‘(i) the amount paid for property sold
or used in connection with a business ac-
tivity,
‘‘(ii) the amount paid for services
(other than for the services of employees,
including fringe benefits paid by reason of
such services) in connection with a busi-
ness activity, and
‘‘(iii) any excise tax, sales tax, cus-
toms duty, or other separately stated levy
imposed by a Federal, State, or local gov-
ernment on the purchase of property or
services which are for use in connection
with a business activity.
Such term shall not include any tax imposed by
chapter 2 or 21.
‘‘(B) EXCEPTIONS.—Such term shall not
include—
‘‘(i) items described in subparagraphs
(B) and (C) of paragraph (1), and
‘‘(ii) items for personal use not in
connection with any business activity.
‘‘(C) EXCHANGES.—For purposes of this
section, the amount treated as paid in connec-
tion with the exchange of property or services
is the fair market value of the property or serv-
ices exchanged, plus any money paid.
‘‘(e) SPECIAL
RULES
FOR
FINANCIAL
INTER-
MEDIATION SERVICE ACTIVITIES.—In the case of the
business activity of providing financial intermediation
services, the taxable income from such activity shall be
equal to the value of the intermediation services provided
in such activity.
‘‘(f) EXCEPTION FOR SERVICES PERFORMED AS EM-
PLOYEE.—For purposes of this section, the term ‘business
activity’ does not include the performance of services by
an employee for the employee’s employer.
‘‘(g) CARRYOVER OF CREDIT-EQUIVALENT OF EX-
CESS DEDUCTIONS.—
‘‘(1) IN GENERAL.—If the aggregate deductions
for any taxable year exceed the gross active income
for such taxable year, the credit-equivalent of such
excess shall be allowed as a credit against the tax
imposed by this section for the following taxable
year.
‘‘(2) CREDIT-EQUIVALENT OF EXCESS DEDUC-
TIONS.—For purposes of paragraph (1), the credit-
equivalent of the excess described in paragraph (1)
for any taxable year is an amount equal to—
‘‘(A) the sum of—
‘‘(i) such excess, plus
‘‘(ii) the product of such excess and
the 3-month Treasury rate for the last
month of such taxable year, multiplied by
‘‘(B) the rate of the tax imposed by sub-
section (a) for such taxable year.
‘‘(3) CARRYOVER OF UNUSED CREDIT.—If the
credit allowable for any taxable year by reason of
this subsection exceeds the tax imposed by this sec-
tion for such year, then (in lieu of treating such ex-
cess as an overpayment) 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,
shall be allowed as a credit against the tax imposed
by this section for the following taxable year.
‘‘(4) 3-MONTH TREASURY RATE.—For purposes
of this subsection, the 3-month Treasury rate is the
rate determined by the Secretary based on the aver-
age market yield (during any 1-month period se-
lected by the Secretary and ending in the calendar
month in which the determination is made) on out-
standing marketable obligations of the United States
with remaining periods to maturity of 3 months or
less.’’
(b) TAX
ON TAX-EXEMPT ENTITIES PROVIDING
NONCASH
COMPENSATION
TO
EMPLOYEES.—Section
4977 of such Code is amended to read as follows:
‘‘SEC. 4977. TAX ON NONCASH COMPENSATION PROVIDED
TO EMPLOYEES NOT ENGAGED IN BUSINESS
ACTIVITY.
‘‘(a) IMPOSITION OF TAX.—There is hereby imposed
a tax equal to 20 percent (17 percent in the case of cal-
endar years beginning after December 31, 1998) of the
value of excludable compensation provided during the cal-
endar year by an employer for the benefit of employees
to whom this section applies.
‘‘(b) LIABILITY FOR TAX.—The tax imposed by this
section shall be paid by the employer.
‘‘(c) EXCLUDABLE COMPENSATION.—For purposes
of subsection (a), the term ‘excludable compensation’
means any remuneration for services performed as an em-
ployee other than—
‘‘(1) wages (as defined in section 3121(a) with-
out regard to paragraph (1) thereof) which are paid
in cash,
‘‘(2) remuneration for services performed out-
side the United States, and
‘‘(3) retirement contributions to or under any
plan or arrangement which makes retirement dis-
tributions (as defined in section 63(c)).
‘‘(d) EMPLOYEES TO WHOM SECTION APPLIES.—
This section shall apply to an employee who is employed
in any activity by—
‘‘(1) any organization which is exempt from
taxation under this chapter, or
‘‘(2) any agency or instrumentality of the
United States, any State or political subdivision of
a State, or the District of Columbia.’’
SEC. 103. SIMPLIFICATION OF RULES RELATING TO QUALI-
FIED RETIREMENT PLANS.
(a) IN GENERAL.—The following provisions of the In-
ternal Revenue Code of 1986 are hereby repealed:
(1) NONDISCRIMINATION RULES.—
(A) Paragraphs (4) and (5) of section
401(a) (relating to nondiscrimination require-
ments).
(B) Sections 401(a)(10)(B) and 416 (re-
lating to top heavy plans).
(C) Section 401(a)(17) (relating to com-
pensation limit).
(D) Sections 401(a)(26) and 410(b) (relat-
ing to minimum participation and coverage re-
quirements).
(E) Paragraphs (3), (8), (11), and (12) of
sections 401(k), and section 4979, (relating to
actual deferral percentage).
(F) Section 401(l) (relating to permitted
disparity in plan contributions or benefits).
(G) Section 401(m) (relating to non-
discrimination test for matching contributions
and employee contributions).
(H) Paragraphs (1)(D) and (12) of section
403(b) (relating to nondiscrimination require-
ments).
(I) Paragraph (3) of section 408(k) and
paragraph (6) (other than subparagraph (A)(i))
of such section (relating to simplified employee
pensions).
(2) CONTRIBUTION LIMITS.—
(A) Sections 401(a)(16), 403(b) (2) and
(3), and 415 (relating to limitations on benefits
and contributions under qualified plans).
(B) Sections 401(a)(30) and 402(g) (relat-
ing to limitation on exclusion for elective defer-
rals).
(C) Paragraphs (3) and (7) of section
404(a) (relating to percentage of compensation
limits).
(D) Section 404(l) (relating to limit on in-
cludible compensation).
(3) RESTRICTIONS ON DISTRIBUTIONS.—
(A) Section 72(t) (relating to 10-percent
additional tax on early distributions from quali-
fied retirement plans).
(B) Sections 401(a)(9), 403(b)(10), and
4974 (relating to minimum distribution rules).
(C) Section 402(e)(4) (relating to net un-
realized appreciation).
(D) Section 4980A (relating to tax on ex-
cess distributions from qualified retirement
plans).
(4) SPECIAL REQUIREMENTS FOR PLAN BENE-
FITING SELF-EMPLOYED INDIVIDUALS.—Subsections
(a)(10)(A) and (d) of section 401.
(5) PROHIBITION OF TAX-EXEMPT ORGANIZA-
TIONS AND GOVERNMENTS FROM HAVING QUALIFIED
CASH
OR
DEFERRED
ARRANGEMENTS.—Section
401(k)(4)(B).
(b) EMPLOYER REVERSIONS OF EXCESS PENSION
ASSETS PERMITTED SUBJECT ONLY TO INCOME INCLU-
SION.—
(1) REPEAL
OF
TAX
ON
EMPLOYER
REVER-
SIONS.—Section 4980 of such Code is hereby re-
pealed.
(2) EMPLOYER REVERSIONS PERMITTED WITH-
OUT
PLAN
TERMINATION.—Section 420 of such
Code is amended to read as follows:
‘‘SEC. 420. TRANSFERS OF EXCESS PENSION ASSETS.
‘‘(a) IN GENERAL.—If there is a qualified transfer
of any excess pension assets of a defined benefit plan
(other than a multiemployer plan) to an employer—
‘‘(1) a trust which is part of such plan shall not
be treated as failing to meet the requirements of sec-
tion 401(a) or any other provision of law solely by
reason of such transfer (or any other action author-
ized under this section), and
‘‘(2) such transfer shall not be treated as a pro-
hibited transaction for purposes of section 4975.
The gross income of the employer shall include the amount
of any qualified transfer made during the taxable year.
‘‘(b) QUALIFIED TRANSFER.—For purposes of this
section—
‘‘(1) IN GENERAL.—The term ‘qualified trans-
fer’ means a transfer—
‘‘(A) of excess pension assets of a defined
benefit plan to the employer, and
‘‘(B) with respect to which the vesting re-
quirements of subsection (c) are met in connec-
tion with the plan.
‘‘(2) ONLY 1 TRANSFER PER YEAR.—No more
than 1 transfer with respect to any plan during a
taxable year may be treated as a qualified transfer
for purposes of this section.
‘‘(c) VESTING REQUIREMENTS OF PLANS TRANSFER-
RING ASSETS.—The vesting requirements of this sub-
section are met if the plan provides that the accrued pen-
sion benefits of any participant or beneficiary under the
plan become nonforfeitable in the same manner which
would be required if the plan had terminated immediately
before the qualified transfer (or in the case of a partici-
pant who separated during the 1-year period ending on
the date of the transfer, immediately before such separa-
tion).
‘‘(d) DEFINITION AND SPECIAL RULE.—For pur-
poses of this section—
‘‘(1) EXCESS PENSION ASSETS.—The term ‘ex-
cess pension assets’ means the excess (if any) of—
‘‘(A) the amount determined under section
412(c)(7)(A)(ii), over
‘‘(B) the greater of—
‘‘(i) the amount determined under
section 412(c)(7)(A)(i), or
‘‘(ii) 125 percent of current liability
(as defined in section 412(c)(7)(B)).