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Q: SECTION 1. EXCLUSION OF NET CAPITAL GAIN OF TAXPAYERS OTHER THAN
CORPORATIONS.

(a) In General.--Part I of subchapter P of chapter 1 of the
Internal Revenue Code of 1986 (relating to treatment of capital gains)
is amended by adding at the end the following new section:

''SEC. 1203. EXCLUSION OF NET CAPITAL GAIN OF TAXPAYERS OTHER THAN
CORPORATIONS.

''In the case of a taxpayer other than a corporation, gross income
shall not include an amount equal to the net capital gain of the
taxpayer for the taxable year.''
(b) Conforming Amendments.--
(1) Section 1 of such Code is amended by striking
subsection (h).
(2) Subsection (b) of section 55 of such Code is amended by
striking paragraph (3).
(3) Section 1222 of such Code is amended by adding at the
end the following new sentence:
''Determinations under this section shall be made before the
application of section 1203.''
(4) The table of sections for part I of subchapter P of
chapter 1 of such Code is amended by adding at the end the
following new item:

''Sec. 1203. Exclusion of net capital
gain of taxpayers other than
corporations.''
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2002.

SEC. 2. EXCLUSION INTEREST AND DIVIDEND INCOME FROM TAX.

(a) In General.--Part III of subchapter B of chapter 1 of the
Internal Revenue Code of 1986 (relating to amounts specifically
excluded from gross income) is amended by inserting after section 115
the following new section:

''SEC. 116. EXCLUSION OF DIVIDENDS AND INTEREST RECEIVED BY
INDIVIDUALS.

''(a) Exclusion From Gross Income.--Gross income does not include
dividends and interest otherwise includible in gross income which are
received during the taxable year by an individual.
''(b) Certain Dividends Excluded.--Subsection (a) shall not apply
to any dividend from a corporation which for the taxable year of the
corporation in which the distribution is made is a corporation exempt
from tax under section 521 (relating to farmers' cooperative
associations).
''(c) Special Rules.--For purposes of this section--
''(1) Exclusion not to apply to capital gain dividends from
regulated investment companies and real estate investment
trusts.--

''For treatment of capital gain
dividends, see sections 854(a) and 857(c).
''(2) Certain nonresident aliens ineligible for
exclusion.--In the case of a nonresident alien individual,
subsection (a) shall apply only in determining the taxes
imposed for the taxable year pursuant to sections 871(b)(1) and
877(b).
''(3) Dividends from employee stock ownership plans.--
Subsection (a) shall not apply to any dividend described in
section 404(k).''.
(b) Conforming Amendments.--
(1) Subparagraph (C) of section 32(c)(5) of such Code is
amended by striking ''or'' at the end of clause (i), by
striking the period at the end of clause (ii) and inserting '';
or'', and by inserting after clause (ii) the following new
clause:
''(iii) interest and dividends received
during the taxable year which are excluded from
gross income under section 116.''.
(2) Subparagraph (A) of section 32(i)(2) of such Code is
amended by inserting ''(determined without regard to section
116)'' before the comma.
(3) Subparagraph (B) of section 86(b)(2) of such Code is
amended to read as follows:
''(B) increased by the sum of--
''(i) the amount of interest received or
accrued by the taxpayer during the taxable year
which is exempt from tax, and
''(ii) the amount of interest and dividends
received during the taxable year which are
excluded from gross income under section
116.''.
(4) Subsection (d) of section 135 of such Code is amended
by redesignating paragraph (4) as paragraph (5) and by
inserting after paragraph (3) the following new paragraph:
''(4) Coordination with section 116.--This section shall be
applied before section 116.''.
(5) Paragraph (2) of section 265(a) of such Code is amended
by inserting before the period '', or to purchase or carry
obligations or shares, or to make deposits, to the extent the
interest thereon is excludable from gross income under section
116''.
(6) Subsection (c) of section 584 of such Code is amended
by adding at the end the following new flush sentence:
''The proportionate share of each participant in the amount of
dividends or interest received by the common trust fund and to which
section 116 applies shall be considered for purposes of such section as
having been received by such participant.''.
(7) Subsection (a) of section 643 of such Code is amended
by redesignating paragraph (7) as paragraph (8) and by
inserting after paragraph (6) the following new paragraph:
''(7) Dividends or interest.--There shall be included the
amount of any dividends or interest excluded from gross income
pursuant to section 116.''.
(8) Section 854(a) of such Code is amended by inserting
''section 116 (relating to exclusion of dividends and interest
received by individuals) and'' after ''For purposes of''.
(9) Section 857(c) of such Code is amended to read as
follows:
''(c) Restrictions Applicable to Dividends Received From Real
Estate Investment Trusts.--
''(1) Treatment for section 116.--For purposes of section
116 (relating to exclusion of dividends and interest received
by individuals), a capital gain dividend (as defined in
subsection (b)(3)(C)) received from a real estate investment
trust which meets the requirements of this part shall not be
considered as a dividend.
''(2) Treatment for section 243.--For purposes of section
243 (relating to deductions for dividends received by
corporations), a dividend received from a real estate
investment trust which meets the requirements of this part
shall not be considered as a dividend.''.
(10) The table of sections for part III of subchapter B of
chapter 1 of such Code is amended by inserting after the item
relating to section 115 the following new item:

''Sec. 116. Exclusion of dividends and
interest received by
individuals.''.
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2002.

SEC. 3. REPEAL OF 1993 INCOME TAX INCREASE ON SOCIAL SECURITY BENEFITS.

(a) Restoration of Prior Law Formula.--Subsection (a) of section 86
of the Internal Revenue Code of 1986 is amended to read as follows:
''(a) In General.--Gross income for the taxable year of any
taxpayer described in subsection (b) (notwithstanding section 207 of
the Social Security Act) includes Social Security benefits in an amount
equal to the lesser of--
''(1) one-half of the Social Security benefits received
during the taxable year, or
''(2) one-half of the excess described in subsection
(b)(1).''
(b) Repeal of Adjusted Base Amount.--Subsection (c) of section 86
of such Code is amended to read as follows:
''(c) Base Amount.--For purposes of this section, the term 'base
amount' means--
''(1) except as otherwise provided in this subsection,
$25,000,
''(2) $32,000 in the case of a joint return, and
''(3) zero in the case of a taxpayer who--
''(A) is married as of the close of the taxable
year (within the meaning of section 7703) but does not
file a joint return for such year, and
''(B) does not live apart from his spouse at all
times during the taxable year.''
(c) Conforming Amendments.--
(1) Subparagraph (A) of section 871(a)(3) of such Code is
amended by striking ''85 percent'' and inserting ''50
percent''.
(2)(A) Subparagraph (A) of section 121(e)(1) of the Social
Security Amendments of 1983 (Public Law 98-21) is amended--
(i) by striking ''(A) There'' and inserting
''There'';
(ii) by striking ''(i)'' immediately following
''amounts equivalent to''; and
(iii) by striking '', less (ii)'' and all that
follows and inserting a period.
(B) Paragraph (1) of section 121(e) of such Act is amended
by striking subparagraph (B).
(C) Paragraph (3) of section 121(e) of such Act is amended
by striking subparagraph (B) and by redesignating subparagraph
(C) as subparagraph (B).
(D) Paragraph (2) of section 121(e) of such Act is amended
in the first sentence by striking ''paragraph (1)(A)'' and
inserting ''paragraph (1)''.
(d) Effective Dates.--
(1) In general.--Except as otherwise provided in this
subsection, the amendments made by this section shall apply to
taxable years beginning after December 31, 2002.
(2) Subsection (c)(1).--The amendment made by subsection
(c)(1) shall apply to benefits paid after December 31, 2002.
(3) Subsection (c)(2).--The amendments made by subsection
(c)(2) shall apply to tax liabilities for taxable years
beginning after December 31, 2002.
(e) Maintenance of Transfers to Hospital Insurance Trust Fund.--
(1) In general.--There are hereby appropriated to the
Hospital Insurance Trust Fund established under section 1817 of
the Social Security Act amounts equal to the reduction in
revenues to the Treasury by reason of the enactment of this
section. Amounts appropriated by the preceding sentence shall
be transferred from the general fund at such times and in such
manner as to replicate to the extent possible the transfers
which would have occurred to such Trust Fund had this Act not
been enacted.
(2) Reports.--The Secretary of the Treasury or the
Secretary's delegate shall annually report to the Committee on
Ways and Means of the House of Representatives and the
Committee on Finance of the Senate the amounts and timing of
the transfers under this section.
A:
Amends the Internal Revenue Code to exclude from individual gross income: (1) net capital gains; and (2) interest and dividends, not including dividends from farmers' cooperative associations, regulated investment companies and real estate investment trusts, and employee stock ownership plans.Repeals the 85 percent (second tier) taxation of Social Security and Railroad Retirement benefits. Transfers from the general fund in the Treasury to the Hospital Insurance Trust Fund amounts equal to the resultant reduction in revenues.