article: SECTION 1. SHORT TITLE. This Act may be cited as the ``Flat Tax Act of 1995''. TITLE I--FLAT TAX SEC. 101. 15 PERCENT INCOME TAX RATE FOR INDIVIDUALS. Section 1 of the Internal Revenue Code of 1986 (relating to tax imposed on individuals) is amended to read as follows: ``SECTION 1. TAX IMPOSED. ``(a) In General.--There is hereby imposed on the income of every individual a tax equal to 15 percent of the excess of the earned income of such individual for the taxable year over the standard exemption amount for such year. ``(b) Definitions.--For purposes of this section-- ``(1) Standard exemption amount.-- ``(A) In general.--The term `standard exemption amount' means the sum of-- ``(i) the basic standard exemption, plus ``(ii) the additional standard exemption. ``(B) Basic standard exemption.--For purposes of subparagraph (A), the basic standard exemption is-- ``(i) $20,000 in the case of-- ``(I) a joint return, and ``(II) a surviving spouse (as defined in section 2(a)), ``(ii) $15,000 in the case of a head of household (as defined in section 2(b)), and ``(iii) $10,000 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. ``(C) Additional standard exemption.--For purposes of subparagraph (A), the additional standard exemption is $5,000 for each dependent (as defined in section 152)-- ``(i) whose earned income for the calendar year in which the taxable year of the taxpayer begins is less than the basic standard exemption specified in subparagraph (B)(iii), or ``(ii) who is a child of the taxpayer and who-- ``(I) has not attained the age of 19 at the close of the calendar year in which the taxable year of the taxpayer begins, or ``(II) is a student who has not attained the age of 24 at the close of such calendar year. ``(D) Inflation adjustment.-- ``(i) In general.--In the case of any taxable year beginning in a calendar year after 1997, each dollar amount contained in subparagraphs (B) and (C) shall be increased by an amount equal to-- ``(I) such dollar amount, multiplied by ``(II) the cost-of-living adjustment for the calendar year in which the taxable year begins. ``(ii) Cost-of-living adjustment.--For purposes of this subparagraph-- ``(I) In general.--The cost-of- living adjustment for any calendar year is the percentage (if any) by which the CPI for October of the preceding calendar year, exceeds the CPI for October of 1996. ``(II) CPI.--The term `CPI' means the last Consumer Price Index for all- urban consumers published by the Department of Labor. ``(iii) Rounding.--If the increase determined under this subparagraph is not a multiple of $10, such increase shall be rounded to the nearest multiple of $10. ``(2) Earned income.-- ``(A) In general.--Except as provided in subparagraph (B), the term `earned income' means-- ``(i) wages, salaries, and other employee compensation, ``(ii) the amount of the taxpayer's net earnings from self-employment for the taxable year, and ``(iii) the amount of dividends which are from a personal service corporation or which are otherwise directly or indirectly compensation for services. ``(B) Exceptions.--The term `earned income' does not include-- ``(i) any amount received as a pension or annuity, or ``(ii) any tip unless the amount of the tip is not within the discretion of the service- recipient.'' SEC. 102. TRANSITION RULE FOR HOME MORTGAGE INTEREST DEDUCTION. Section 1 of the Internal Revenue Code of 1986, as amended by section 2 of this Act, is amended-- (1) by striking subsection (a) and inserting the following new subsection: ``(a) In General.--There is hereby imposed on the income of every individual a tax equal to 15 percent of the excess of-- ``(1) the earned income of the taxpayer for the taxable year, over ``(2) the standard exemption amount and the excess qualified residence interest amount for such taxpayer for such year.'', and (2) in subsection (b), by redesignating paragraph (2) as paragraph (3) and by inserting after paragraph (1) the following new paragraph: ``(2) Excess qualified residence interest amount.--The excess qualified residence amount for any taxable year is equal to the excess (if any) of-- ``(A) the amount which would have been allowable as a deduction to the taxpayer for such year under section 163(h)(3), as in effect on the day before the effective date of the Flat Tax Act of 1995 (determined without regard to section 68 (as so in effect)), with respect to any indebtedness incurred on or before such day, over ``(B) one-half of the basic standard exemption for an individual for such year.'' SEC. 103. 15 PERCENT INCOME TAX RATE FOR BUSINESS ACTIVITIES. Section 11 of the Internal Revenue Code of 1986 (relating to tax imposed on corporations) is amended to read as follows: ``SEC. 11. TAX IMPOSED. ``(a) Tax Imposed.--There is hereby imposed on every person engaged in a business activity a tax equal to 15 percent 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.-- ``(1) In general.--For purposes of this section, 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 contributions to qualified retirement plans but not including other fringe benefits) paid for employees 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 subparagraph (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 inputs brought into the United States, and ``(C) the actual cost, if reasonable, of travel and entertainment expenses for business purposes. Such term shall not include purchases of goods and services provided to employees or owners. ``(e) Carryover of Excess Deductions.--If the aggregate deductions for any taxable year exceed the gross active income for such taxable year, the amount of the deductions specified in subsection (d) for the succeeding taxable year (determined without regard to this subsection) shall be increased by the sum of-- ``(1) such excess, plus ``(2) the product of such excess and the 3-month Treasury rate for the last month of such taxable year.'' SEC. 104. REPEAL OF SPECIAL DEDUCTIONS, CREDITS, AND EXCLUSIONS FROM INCOME FOR CORPORATIONS AND INDIVIDUALS. Chapter 1 of the Internal Revenue Code of 1986 is amended by striking out all specific exclusions from gross income, all deductions, and all credits against income tax to the extent related to the computation of corporate and individual income tax liability. SEC. 105. REPEAL OF ESTATE AND GIFT TAXES. Subtitle B of the Internal Revenue Code of 1986 (relating to estate, gift, and generation-skipping taxes) is hereby repealed. SEC. 106. EFFECTIVE DATES. (a) In General.--Except as provided in subsection (b), the amendments made by this title shall apply to taxable years beginning after December 31, 1996. (b) Repeal of Estate and Gift Taxes.--The repeal made by section 105 shall apply to estates of decedents dying, and transfers made, after December 31, 1996. (c) Technical and Conforming Changes.--The Secretary of the Treasury or the Secretary's delegate shall, as soon as practicable but in any event not later than 90 days after the date of the enactment of this Act, submit to the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate a draft of any technical and conforming changes in the Internal Revenue Code of 1986 which are necessary to reflect throughout such Code the changes in the substantive provisions of law made by this Act. TITLE II--REDUCTIONS IN FEDERAL SPENDING SEC. 201. REDUCTIONS IN FEDERAL SPENDING. (a) Adjustment of Discretionary Caps.-- (1) Discretionary spending limits and direct spending balances.--Not later than 5 days after the date of enactment of this Act, the President shall reduce the discretionary spending limits under section 601 of the Congressional Budget Act of 1974 for each of the fiscal years 1996, 1997, and 1998 to reflect a reduction of 15 percent in budget authority and budget outlays for each fiscal year. (2) Adjustment of committee allocations.--Not later than 5 days after the date of enactment of this Act, the chairs of the Committees on the Budget of the Senate and the House of Representatives shall revise levels under section 311(a) of the Congressional Budget Act of 1974 and adjust the committee allocations under section 602(a) of the Congressional Budget Act of 1974 to reflect the reductions required by paragraph (1). (b) Foreign Aid.--Notwithstanding subsection (a), the amount of budget authority provided under budget function 150 relating to United States assistance (as defined in section 481(e)(4) of the Foreign Assistance Act of 1961 (22 U.S.C. 2291(e)(4)) for payments not required by law shall not exceed-- (1) for fiscal year 1996, 60 percent of the amount provided for fiscal year 1995; (2) for fiscal year 1997, 50 percent of the amount provided for fiscal year 1995; and (3) for fiscal year 1998, 40 percent of the amount provided for fiscal year 1995. (c) Freeze on Department of Defense.--Notwithstanding subsection (a), the amount of budget authority provided under budget function 050 (national defense) for payments not required by law for each of the fiscal years 1996, 1997, and 1998 shall not exceed the amount provided for fiscal year 1995. (d) No Reduction in the Administrative Expenses of the Social Security Administration and Medicare.--Notwithstanding subsection (a), the amount of budget authority provided for the administrative expenses of the Social Security Administration and medicare for payments not required by law for each of the fiscal years 1996, 1997, and 1998 shall not be reduced by reason of subsection (a). SEC. 202. REDUCTION IN DIRECT SPENDING. (a) Reduction.-- (1) In general.--Except as provided in paragraph (2), the level of direct spending for fiscal years 1996, 1997, and 1998 shall not exceed 85 percent of the level for fiscal year 1995. (2) Exception.--Paragraph (1) shall not apply to-- (A) social security; (B) medicare; and (C) veterans' programs. (b) Implementing Legislation.-- (1) Committee action.--Not later than September 1, 1995, the committees of the House of Representatives and Senate shall report legislation reducing the direct spending programs within their jurisdiction as required by subsection (a). (2) Enactment.--Not later than September 30, 1995, the Senate and the House of Representatives shall enact legislation complying with paragraph (1). SEC. 203. ELIMINATION OF THE INTERNAL REVENUE SERVICE. (a) Elimination of the Internal Revenue Service.--Effective January 1, 1997, the Internal Revenue Service is abolished. (b) Transfer of Functions.-- (1) Function defined.--For purposes of this subsection, the term ``function'' means any duty, obligation, power, authority, responsibility, right, privilege, activity, or program. (2) Transfer to treasury.--The functions of the Internal Revenue Service are transferred to the Department of the Treasury. (3) Transfer to secretary.--The functions of the Commissioner of Internal Revenue shall be performed by the Secretary of the Treasury or the designee of the Secretary. (b) Amendment to the Internal Revenue Code of 1986.--Section 7802(a) of the Internal Revenue Code of 1986 is repealed. (c) References.--Reference in any other Federal law, Executive order, rule, regulation, or delegation of authority, or any document of or relating to-- (1) the Commissioner of Internal Revenue with regard to functions transferred under this subsection, shall be deemed to refer to the Secretary of the Treasury; and (2) the Internal Revenue Service with regard to functions transferred under this subsection, shall be deemed to refer to the Department of the Treasury. (d) Additional Conforming Amendments.-- (1) After consultation with the appropriate committees of the Congress, the Secretary of the Treasury shall prepare and submit to the Congress recommended legislation containing technical and conforming amendments to reflect the changes made by this subsection. (2) Not later than 6 months after the effective date of this Act, the Secretary of the Treasury shall submit the recommended legislation referred to under paragraph (1).
summary: TABLE OF CONTENTS: Title I: Flat Tax Title II: Reductions in Federal Spending Flat Tax Act of 1995 - Title I: Flat Tax - Amends the Internal Revenue Code to impose a 15 percent tax on the income of every individual. Establishes a basic standard exemption of $20,000 for a joint return and $10,000 for an individual return, with an additional $5,000 exemption for each dependent. Sets forth provisions for a transition rule for home mortgage interest deduction with respect to existing mortgages. Imposes on every person engaged in a business activity a tax equal to 15 percent of business taxable income. Repeals all specific exclusions from gross income, all deductions, and all credits against income tax to the extent related to the computation of corporate and individual income tax liability. Repeals estate, gift, and generation-skipping taxes. Title II: Reductions in Federal Spending - Directs the President to reduce the discretionary spending limits the Congressional Budget Act of 1974 for each of FY 1996 through 1998 to reflect a reduction of 15 percent in budget authority and budget outlays for each fiscal year. Specifies that notwithstanding the above, the amount of budget authority provided for foreign aid payments not required by law shall not exceed: (1) for FY 1996, 60 percent of the amount provided for FY 1995; (2) for FY 1997, 50 percent of the amount provided for FY 1995; and (3) for FY 1998, 40 percent of the amount provided for FY year 1995. Requires that notwithstanding discretionary spending limits above, the amount of budgetary authority provided for the Defense Department for payments not required by law for each of FY 1996 through 1998 shall not exceed the amount provided for FY 1995. Directs that the amount of budget authority provided for the administrative expenses of the Social Security Administration and Medicare for payments not required by law for each of FY 1996 through 1998 shall not be reduced. Provides that a reduction in the level of direct spending for FY 1996 through 1998 shall not exceed 85 percent of the level for FY 1995, except for: (1) Social Security; (2) Medicare; and (3) veterans's programs. Abolishes the Internal Revenue Service (IRS) and transfers the functions of the IRS to the Department of the Treasury. Transfers the functions of the IRS Commissioner to the Secretary of the Treasury.