‘‘(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. 
‘‘SEC. 60C. TAX ON NONCASH COMPENSATION PROVIDED 
TO EMPLOYEES NOT ENGAGED IN BUSINESS 
ACTIVITY. 
‘‘(a) IMPOSITION OF TAX.—There is hereby imposed 
a tax equal to 19 percent (17 percent in the case of cal-
endar years beginning after December 31, 2004) 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.’’
(b) CLERICAL AMENDMENT.—The table of parts for 
subchapter A of chapter 1 of such Code is amended by 
adding at the end the following new item:
‘‘PART VIII. FREEDOM FLAT TAX.’’.
(c) EFFECTIVE DATE.—The amendments made by 
this title shall apply to taxable years beginning after De-
cember 31, 2003.
Æ