Flat Tax Act
Bill: H.R.1040 | Sponsor: Rep. Burgess, Michael C. (R-TX)
Policy area: Taxation

Summary:
Flat Tax Act
This bill authorizes an individual or a person engaged in business activity to make an irrevocable election to be subject to a flat tax (in lieu of the existing income tax provisions) of 19% for the first two years after an election is made, and 17% thereafter.
The bill calculates taxable income for individual taxpayers by subtracting a basic standard deduction and an additional standard deduction for each dependent from the total of wages, retirement distributions, and unemployment compensation. "Business taxable income" is gross active income reduced by certain deductions for the cost of business inputs, wages, and retirement contributions.
The bill imposes an employer tax on the value of excludable compensation provided to employees not engaged in business activity of 19% for the first two years after an election is made under this bill and 17% thereafter.
The bill also repeals the estate, gift, and generation-skipping transfer taxes.
A two-thirds vote of the House of Representatives and the Senate is required to increase the flat tax rate proposed by this bill or to reduce the amount of the standard deduction or business-related deductions allowed by this bill.

To amend the Internal Revenue Code of 1986 to provide taxpayers a flat 
           tax alternative to the current income tax system.

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

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Flat Tax Act''.

SEC. 2. THE FLAT TAX.

    (a) In General.--Subchapter A of chapter 1 of the Internal Revenue 
Code of 1986 is amended by inserting after part VII the following new 
part:

                       ``PART VIII--THE FLAT TAX

``Sec. 60. Irrevocable election to be subject to flat tax.
``Sec. 60A. Tax imposed on individuals.
``Sec. 60B. Tax imposed on business activities.
``Sec. 60C. Tax on noncash compensation provided to employees not 
                            engaged in business activity.

``SEC. 60. IRREVOCABLE ELECTION TO BE SUBJECT TO FLAT TAX.

    ``(a) Individual.--
            ``(1) In general.--Except as provided in paragraph (2), in 
        lieu of the tax imposed by sections 1 (relating to tax imposed) 
        and 55 (relating to alternative minimum tax imposed), under 
        regulations prescribed by the Secretary, an individual may make 
        an irrevocable election to be subject to the tax imposed by 
        this part.
            ``(2) Innocent spouse exception.--An individual who has 
        made an election under paragraph (1) and who subsequently 
        obtains relief of liability for tax under section 6015(b) may, 
        not later than 1 year after the date such relief is granted, 
        revoke the election made under paragraph (1).
    ``(b) Person Engaged in Business Activity.--In lieu of the tax 
imposed by sections 11 (relating to tax imposed) and 55 (relating to 
alternative minimum tax imposed), under regulations prescribed by the 
Secretary, a person engaged in business activity may make an 
irrevocable election to be subject to the tax imposed by this part.
    ``(c) Disallowance of Credits.--No credit shall be allowed under 
this chapter for any taxable year to any person with respect to whom an 
election under subsection (a) or (b) is in effect.

``SEC. 60A. TAX IMPOSED ON INDIVIDUALS.

    ``(a) In General.--There is hereby imposed on the taxable income of 
every individual who makes an election to be subject to this part a tax 
equal to--
            ``(1) 19 percent of the taxable income of such individual 
        for such taxable year in the case of the first 2 taxable years 
        of the individual beginning with the taxable year for which the 
        election is made, and
            ``(2) 17 percent of the taxable income of such individual 
        for such taxable year in the case of all taxable years 
        subsequent to the taxable years described in paragraph (1).
    ``(b) Taxable Income.--For purposes of this part, 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 includible 
                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.
    ``(c) Standard Deduction.--For purposes of this part--
            ``(1) In general.--The term `standard deduction' means the 
        sum of--
                    ``(A) the basic standard deduction, plus
                    ``(B) the additional standard deduction.
            ``(2) Basic standard deduction.--For purposes of paragraph 
        (1), the basic standard deduction is--
                    ``(A) $32,496 in the case of--
                            ``(i) a joint return, or
                            ``(ii) a surviving spouse (as defined in 
                        section 2(a)),
                    ``(B) $20,739 in the case of a head of household 
                (as defined in section 2(b)), and
                    ``(C) $16,248 in the case of an individual--
                            ``(i) who is not married and who is not a 
                        surviving spouse or head of household, 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 $6,998 for 
        each dependent (as defined in section 152) who is a qualifying 
        child (as defined in section 152(c)(1)) for the taxable year 
        and who is not required to file a return for such taxable year.
    ``(d) Retirement Distributions.--For purposes of this section, 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.
    ``(e) Income of Certain Children.--For purposes of this part--
            ``(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 this section with respect to such income and shall 
        not be required to file a return for such taxable year.
    ``(f) Inflation Adjustment.--
            ``(1) In general.--In the case of any taxable year 
        beginning in a calendar year after 2021, each dollar amount 
        contained in subsection (c) 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 purposes 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 2020.
            ``(3) CPI for any calendar year.--For purposes 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 August 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 consistent 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 multiple of $10.
    ``(g) Marital Status.--For purposes of this section, marital status 
shall be determined under section 7703.

``SEC. 60B. TAX IMPOSED ON BUSINESS ACTIVITIES.

    ``(a) Tax Imposed.--There is hereby imposed on every person engaged 
in a business activity who makes an election to be taxed under this 
part a tax equal to--
            ``(1) 19 percent of the business taxable income of such 
        person for such taxable year in the case of the first 2 taxable 
        years of the person beginning with the taxable year for which 
        the election is made, and
            ``(2) 17 percent of the business taxable income of such 
        person for such taxable year in the case of all taxable years 
        subsequent to the taxable years described in paragraph (1).
    ``(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 paragraph (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 activity, 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 received, 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 include 
                        money or any financial instrument, and
                            ``(ii) the term `services' does not include 
                        financial services.
            ``(3) Exemption from tax for activities of governmental 
        entities and tax-exempt organizations.--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 retirement distributions (as 
                defined in section 60A(d)) 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 paragraph (1), 
                the term `cost of business inputs' means--
                            ``(i) the amount paid for property sold or 
                        used in connection with a business activity,
                            ``(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 business 
                        activity, and
                            ``(iii) any excise tax, sales tax, customs 
                        duty, or other separately stated levy imposed 
                        by a Federal, State, or local government 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 connection with the exchange 
                of property or services is the fair market value of the 
                property or services exchanged, plus any money paid.
    ``(e) Special Rules for Financial Intermediation 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 Employee.--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 Excess 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 deductions.--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 subsection (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 section for such year, then (in lieu of 
        treating such excess 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 average market yield (during any 1-
        month period selected by the Secretary and ending in the 
        calendar month in which the determination is made) on 
        outstanding 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 on every employer 
of an employee to whom this section applies and who makes an election 
to be taxed under this part a tax equal to--
            ``(1) 19 percent of the value of excludable compensation 
        provided during the calendar year by the employer for the 
        benefit of employees to whom this section applies in the case 
        of the first 2 calendar years beginning with the calendar year 
        for which the election under section 60 is made, and
            ``(2) 17 percent of such excludable compensation during the 
        calendar year in the case of all calendar years subsequent to 
        the calendar years described in paragraph (1).
    ``(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 employee other than--
            ``(1) wages (as defined in section 3121(a) without regard 
        to paragraph (1) thereof) which are paid in cash,
            ``(2) remuneration for services performed outside the 
        United States, and
            ``(3) retirement contributions to or under any plan or 
        arrangement which makes retirement distributions (as defined in 
        section 60A(d)).
    ``(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. The Flat Tax''.

    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2020.

SEC. 3. REPEAL OF ESTATE AND GIFT TAXES.

    (a) In General.--Subtitle B of the Internal Revenue Code of 1986 is 
hereby repealed.
    (b) Effective Date.--The repeal made by subsection (a) shall apply 
to the estates of decedents dying, and gifts and generation-skipping 
transfers made, after December 31, 2020.
    (c) Cross Reference.--See section 102 of the Internal Revenue Code 
of 1986 for exclusion of gifts and inheritances from gross income.

SEC. 4. SUPERMAJORITY REQUIRED TO CONSIDER REVENUE MEASURE.

    A bill, joint resolution, amendment to a bill or joint resolution, 
or conference report that--
            (1) includes an increase in the rates of tax specified in 
        section 60A(a) or 60B(a) of the Internal Revenue Code of 1986 
        (as amended by this Act), or
            (2) reduces the standard deduction, as defined in section 
        60A(c) of such Code (as so amended), or the deductions 
        specified in section 60B(d) of such Code (as so amended),
may not be considered as passed or agreed to by the House of 
Representatives or the Senate unless so determined by a vote of not 
less than two-thirds of the Members of the House of Representatives or 
the Senate (as the case may be) voting, a quorum being present.
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