‘‘SECTION 1. TAX IMPOSED.
‘‘(a) IMPOSITION OF TAX.—There is hereby imposed
on the income of every individual a tax equal to 20 percent
of the excess (if any) of—
‘‘(1) the taxable earned income received or ac-
crued during the taxable year, over
‘‘(2) the sum of—
‘‘(A) the standard deduction (as defined in
section 63) for such taxable year,
‘‘(B) the deduction under section 170, plus
‘‘(C) the deduction under section 163 for
qualified residence interest (as defined in sec-
tion 163(h)(3)).
‘‘(b) TAXABLE EARNED INCOME.—For purposes of
this section, the term ‘taxable earned income’ means the
excess (if any) of earned income (as defined in section
911(d)(2)) over the foreign earned income (as defined in
section 911(b)(1)).’’
(b) INCREASE IN STANDARD DEDUCTION.—Section
63 of such Code is amended to read as follows:
‘‘SEC. 63. 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) $16,500 in the case of—
‘‘(A) a joint return, and
‘‘(B) a surviving spouse (as defined in sec-
tion 2(a)),
‘‘(2) $14,000 in the case of a head of household
(as defined in section 2(b)), and
‘‘(3) $9,500 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 pur-
poses of subsection (a), the additional standard deduction
is $4,500 for each dependent (as defined in section 152)
described in section 151(c)(1) for the taxable year.
‘‘(d) INFLATION ADJUSTMENT.—
‘‘(1) IN GENERAL.—In the case of any taxable
year beginning in a calendar year after 1996, 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 under
section 1(f)(3) for the calendar year in which
the taxable year begins, determined by sub-
stituting ‘calendar year 1995’ for ‘calendar year
1992’ in subparagraph (B) of such section.
‘‘(2) 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. 2. LIMITATION OF HOME MORTGAGE DEDUCTION TO
ACQUISITION INDEBTEDNESS.
Paragraph (3) of section 163(h) of the Internal Reve-
nue Code of 1986 (relating to interest) is amended—
(1) by striking subparagraphs (A), (C), and (D)
and inserting before subparagraph (B) the following
new subparagraph:
‘‘(A) IN
GENERAL.—The term ‘qualified
residence interest’ means any interest which is
paid or accrued during the taxable year on ac-
quisition indebtedness with respect to any quali-
fied 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.’’, and
(2) by striking ‘‘$1,000,000’’ each place it ap-
pears and ‘‘$500,000’’ in subparagraph (B)(ii) and
inserting ‘‘$100,000’’ and ‘‘$50,000’’, respectively.
SEC. 3. TAX ON BUSINESS ACTIVITIES.
Section 11 of the Internal Revenue Code of 1986 (re-
lating to tax imposed on corporations) 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 of the business taxable income of such per-
son.
‘‘(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 sec-
tion, 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 contribu-
tions to qualified retirement plans but not in-
cluding other fringe benefits) paid for employ-
ees performing services in such activity, and
‘‘(C) the cost of tangible personal and real
property used in such activity.
‘‘(2) BUSINESS INPUTS.—For purposes of sub-
paragraph (A), the term ‘cost of business inputs’
means—
‘‘(A) the actual amount paid for goods,
services, and materials, whether or not resold
during the taxable year,
‘‘(B) the fair market value of business in-
puts brought into the United States, and
‘‘(C) the actual cost, if reasonable, of trav-
el and entertainment expenses for business pur-
poses.
Such term shall not include purchases of goods and
services provided to employees or owners.
‘‘(e) CARRYOVER OF EXCESS DEDUCTIONS.—