Order Code RL34343
Tax Reform: An Overview of Proposals in the
110th Congress
January 30, 2008
James M. Bickley
Specialist in Public Finance
Government and Finance Division

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Tax Reform: An Overview of Proposals in the 110th
Congress
Summary
Tax reform promises to be a major issue in the 110th Congress. This report
examines three main categories of tax reform: fundamental tax reform, tax reform
based on the elimination of the individual alternative minimum tax, and Treasury’s
proposals for reforming the corporate income tax.
Most proposals for fundamental tax reform involve the concept of replacing our
current income tax system with some form of a consumption tax, usually with a
single or “flat tax” rate, whereas other proposals would significantly broaden the
income tax base and lower tax rates. Proponents of these tax revisions often maintain
that they would simplify the tax system, make the government less intrusive, and
create an environment more conducive to saving. Critics express concern about the
distributional consequences and transitional costs of a dramatic change in the tax
system. Most observers believe that the problems and complexities of our current tax
system are not primarily related to the number of tax rates but rather stem from
difficulties associated with measuring the tax base. For those fundamental tax reform
proposals involving shifting to a consumption tax, one or more of the following four
major types of broad-based consumption taxes are included in these congressional
tax proposals: the value-added tax (VAT), the retail sales tax, the consumed-income
tax, and the flat tax based on a proposal formulated by Robert E. Hall and Alvin
Rabushka of the Hoover Institution.
As of January 30, 2008, in the 110th Congress, nine bills for fundamental tax
reform have been introduced: Representative John Linder’s proposal (H.R. 25),
Representative Michael Burgess’s proposal (H.R. 1040), Representative Phil
English’s proposal (H.R. 4159), Representative Chaka Fattah’s proposal (H.R. 2130),
Senator Saxby Chambliss’s proposal (S. 1025), Senator Richard C. Shelby’s proposal
(S. 1040), Senator Arlen Specter’s proposal (S. 1081), Senator Ron Wyden’s
proposal (S. 1111), and Senator Sam Brownback’s proposal (S. 2518). These bills
are described in this report. Two other bills relevant to fundamental tax reform have
been introduced in the 110th Congress: H.R. 510 and S. 747. Although these two
bills are similar and have the same title, “Tax Code Termination Act,” there are
significant differences in their contents.
In the 110th Congress, numerous bills have been introduced that would eliminate
the individual alternative minimum tax (ATM) and require major changes in the tax
code. Arguably, one of the more significant bills, Tax Reduction and Reform Act of
2007 (H.R. 3970), was introduced by House Ways and Means Committee Chair
Charles B. Rangel. A temporary patch for the AMT was passed in the first session
of the 110th Congress, but AMT reform will be debated in the second session.
Two major reports released by the Treasury examine sweeping proposals for
reform of the business income tax system. These reports may be the basis for
legislation in the second session of the 110th Congress.
This report will be updated as issues develop and new legislation is introduced.

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Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Fundamental Tax Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Relationship Between Income and Consumption . . . . . . . . . . . . . . . . . . . . . . 2
What Should Be Taxed? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Types of Broad-Based Consumption Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Value-Added Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Retail Sales Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consumed-Income Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Flat Tax (Hall/Rabushka Concept) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
International Comparisons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Other Types of Fundamental Tax Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Income Tax Reform: Base Broadening . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Option of the Current or an Alternative Income Tax System . . . . . . . . . . . . 6
Legislative Proposals for Fundamental Tax Reform . . . . . . . . . . . . . . . . . . . . . . . 6
Representative John Linder’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Senator Saxby Chambliss’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Representative Michael C. Burgess’s Proposal . . . . . . . . . . . . . . . . . . . . . . . 7
Senator Richard C. Shelby’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Senator Arlen Specter’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Senator Ron Wyden’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Representative Chaka Fattah’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Representative Phil English’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Senator Sam Brownback’s Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Other Legislation about Fundamental Tax Reform . . . . . . . . . . . . . . . . . . . . . . . 12
Tax Reform to Eliminate the AMT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Reform of the Business Income Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Report on “Business Taxation and Global Competitiveness” . . . . . . . . . . . 13
Report on Competitiveness of the U.S. Business Tax System . . . . . . . . . . 14

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Tax Reform: An Overview of Proposals in
the 110th Congress
Introduction
Tax reform promises to be a major issue in the 110th Congress. This report
examines three main categories of tax reform: fundamental tax reform, tax reform
based on the elimination of the individual alternative minimum tax, and Treasury’s
proposals for reforming the corporate income tax.
Most proposals for fundamental tax reform involve the concept of replacing our
current income tax system with some form of a consumption tax, usually with a
single or “flat tax” rate, whereas other proposals would significantly broaden the
income tax base and lower tax rates. Proponents of these tax revisions are concerned
about the administrative and compliance costs of the current income tax system.
Proponents also believe that the current income tax system discourages saving,
reduces economic growth, causes economic distortions, and worsens the nation’s
balance of trade. Critics question whether most of these proposals will improve
macroeconomic performance, express concern about equity issues, and maintain that
transitional costs will be prohibitive. Most observers believe that the problems and
complexities of our current tax system are not primarily related to the number of tax
rates but rather stem from difficulties associated with measuring the tax base.
In the 110th Congress, numerous bill have been introduced that would eliminate
the individual alternative minimum tax (AMT) and require major changes in the tax
code. Arguably the most significant bill was introduced by House Ways and Means
Committee Chair Charles B. Rangel, The Tax Reduction and Reform Act of 2007,
(H.R. 3970). A temporary patch for the AMT was passed in the first session of the
110th Congress, but the issue of AMT reform will be debated in the second session.
Two major reports released by the Treasury examine proposals for reform of the
business income tax system. These reports may be the basis for legislation in the
second session of the 110th Congress.
Fundamental Tax Reform
Most proposals for fundamental tax reform would change the tax base from
income to consumption. Consequently, the initial sections of this report examine
topics concerning broad-based consumption taxation.

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The Relationship Between Income
and Consumption
Although our current tax structure is primarily an income tax, it actually
contains elements of both an income- and a consumption-based tax. For example,
the current tax system includes in its tax base wages, interest, dividends, and capital
gains, all of which are consistent with an income tax. At the same time, however, the
current tax system excludes some savings, such as pension and Individual Retirement
Account contributions, which is consistent with a tax using a consumption base.
The easiest way to understand the differences between the income and
consumption tax bases is to define and understand the economic concept of income.
In its broadest sense, income is a measure of the command over resources that an
individual acquires during a given time period. Conceptually, individuals can
exercise two options with regard to their income: they can consume it or they can
save it. This theoretical relationship between income, consumption, and saving
allows a very useful accounting identity to be established: income, by definition,
must equal consumption plus saving. It follows that a tax that has a measure of
comprehensive income applies to both consumption and savings. A consumption
tax, however, applies to income minus saving.
A consumption tax can be levied at the individual level in a form very similar
to the current system. An individual would add up all income in the same way as he
or she does now under the income tax but then would subtract out net savings (saving
minus borrowing). The result of these calculations would be the consumption base
on which tax is assessed. Equivalently, a consumption tax can also be collected at
the retail level in the form of a sales tax or at each stage of the production process in
the form of a value-added tax (VAT).
Regardless of the form or point where a consumption tax is collected, it is
ultimately paid by the individual doing the consuming. It should be noted that
consumption, in the economy as a whole, is smaller than income. Thus, to raise
equal amounts of revenue in a given year, tax rates on a comprehensive consumption
base would have to be higher than the tax rates on a comprehensive income base.
What Should Be Taxed?
Should the tax base be income or consumption? Is one inherently superior to
the other? How do they stack up in terms of simplicity, fairness, and efficiency —
the three standards by which tax systems are generally assessed? There appears to
be insufficient theoretical or empirical evidence to conclude that a
consumption-based tax is inherently superior to an income-based tax or vice versa.
One issue associated with the choice of a tax base is equity — how the tax
burden will be distributed across income classes and different types of taxpayers. For
example, a tax is “progressive” if tax paid as a percentage of income increases as
income rises. Although some types of consumption taxes can be designed to achieve
any desired level of progressivity with respect to consumption alone, their

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progressivity with respect to income could only be approximated. Also, a
consumption tax would involve a redistribution of the tax burden by age group, with
the young and old generally bearing more of the total tax burden than those in their
prime earning years. And the transition from an income-based tax to a consumption-
based tax would have the potential for creating windfall gains for some taxpayers and
losses for others.
A definitive assessment cannot be made of the effects of taxing consumption on
either economic efficiency or the aggregate level of savings. Although the current
tax system’s distortions of the relative attractiveness of present and future
consumption (saving) would be eliminated, to raise the same amount of tax revenue,
a consumption-based tax would require an increase in marginal tax rates (since
consumption is smaller than income). This action, in turn, would increase the current
system’s distortion between the attractiveness of market (e.g., purchased products)
and nonmarket activities (e.g., leisure). The net effect on overall economic efficiency
cannot be ascertained theoretically. In addition, economic theory indicates a
consumption tax would not necessarily produce an increase in saving. The increase
in after-tax income might reduce saving, while the increase in the return to saving
may increase it; the net result is uncertain.1
A positive aspect of a consumption-based tax is the ease with which the
individual and corporate tax systems could be integrated. In addition, the problems
introduced by separate provisions for capital gains, attempts to distinguish between
real and nominal income, and depreciation procedures would essentially be
eliminated. It is doubtful, however, that a consumption-based tax would have much
effect on the complexities introduced into the system to promote specific social and
economic goals. Many of the same factors that influenced the design of the current
income tax system would exert the same influences on the final design of a
consumption tax.
Whether one prefers income or consumption, one tax rate or multiple tax rates,
a critical point to remember is that the benefits to be derived from tax revision would
result from defining the tax base more comprehensively than it is under current law.
A tax with a base that is comprehensively defined would prove more equitable and
efficient than a tax with a less comprehensively defined base.
Types of Broad-Based Consumption Taxes
Four major types of broad-based consumption taxes are included in
congressional tax proposals: the value-added tax (VAT), the retail sales tax, the
consumed-income tax, and the flat tax based on a proposal formulated by Robert I.
Hall and Alvin Rabushka of the Hoover Institution.2
1 For an analysis of this issue, see CRS Report RS22367, Federal Tax Reform and Its
Potential Effects on Saving, by Gregg A. Esenwein.
2 For an overview of the economic issues relevant to broad-based consumption taxation, see
CRS Report RL32603, The Flat Tax, Value-Added Tax, and National Retail Sales Tax:
(continued...)

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Value-Added Tax
A value-added tax is a tax, levied at each stage of production, on firms’ value
added. The value added of a firm is the difference between a firm’s sales and a
firm’s purchases of inputs from other firms. The VAT is collected by each firm at
every stage of production.
There are three alternative methods of calculating VAT: the credit method, the
subtraction method, and the addition method. Under the credit method, the firm
calculates the VAT to be remitted to the government by a two-step process. First, the
firm multiplies its sales by the tax rate to calculate VAT collected on sales. Second,
the firm credits VAT paid on inputs against VAT collected on sales and remits this
difference to the government. The firm calculates its VAT liability before setting its
prices to fully shift the VAT to the buyer. Under the credit-invoice method, a type
of credit method, the firm is required to show VAT separately on all sales invoices
and to calculate the VAT credit on inputs by adding all VAT shown on purchase
invoices.
Under the subtraction method, the firm calculates its value added by subtracting
its cost of taxed inputs from its sales. Next, the firm determines its VAT liability by
multiplying its value added by the VAT rate.3 Under the addition method, the firm
calculates its value added by adding all payments for untaxed inputs (e.g., wages and
profits). Next, the firm multiplies its value added by the VAT rate to calculate VAT
to be remitted to the government.
Retail Sales Tax
In contrast to a VAT, a retail sales tax is a consumption tax levied only at a
single stage of production, the retail stage. The retailer collects a specific percentage
markup in the retail price of a good or service, which is then remitted to the tax
authorities.
Consumed-Income Tax
Under this consumption tax, taxpayers would keep their assets in an account
equivalent to a current IRA (individual retirement account). Net contributions to this
account (contributions less withdrawals) would be deducted from income to
determine the level of consumed-income. In contrast to a VAT or sales tax,
policymakers would have the option of applying a progressive rate structure to the
level of consumed-income. Each individual would be responsible for calculating his
consumed-income and paying his tax obligation.
2 (...continued)
Overview of the Issues, by Gregg A. Esenwein and Jane G. Gravelle.
3 For a comparison of the credit-invoice method and the subtraction method, see Value-
Added Tax: Methods of Calculation (a general distribution memo), by James M. Bickley,
available on request from the author.

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Flat Tax (Hall/Rabushka Concept)
A flat tax could be levied based on the proposal formulated by Robert E. Hall
and Alvin Rabushka of the Hoover Institution. Their proposal would have two
components: a wage tax and a cash-flow tax on businesses. (A wage tax is a tax
only on salaries and wages; a cash-flow tax is generally a tax on gross receipts minus
all outlays.) It is essentially a modified VAT, with wages and pensions subtracted
from the VAT base and taxed at the individual level. Under a standard VAT, a firm
would not subtract its wage and pension contributions when calculating its tax base.
Under this proposal, some wage income would not be included in the tax base
because of exemptions. Under a standard VAT, all wage income would be included
in the tax base.4
International Comparisons
There are two major distinctions between recent flat tax proposals for the United
States that would change the tax base from income to consumption and the current
tax systems of other developed nations. First, although the United States is the only
developed nation without a broad-based consumption tax at the national level, other
developed nations adopted broad-based consumption taxes as adjuncts to or
replacements for other consumption taxes rather than as replacements for their
income-based taxes. Most of the congressional proposals would replace our current
income taxes with consumption taxes.
Second, all developed nations with VATs, except Japan, calculate their VATs
using the credit-invoice method. In contrast, most of the current U.S. flat tax
proposals, which include VAT components, use the subtraction method of
calculation.
Other Types of Fundamental Tax Reform
Two other types of fundamental tax reform are income tax reform and a tax plan
that gives taxpayers a choice of systems.
Income Tax Reform: Base Broadening
Income tax base broadening would involve eliminating most tax preferences,
increasing the standard deduction and personal exemption allowances, and reducing
tax rates. Proposals of Senator Wyden and Representative Emanuel are in this
category.
4 For a comprehensive overview of this concept, see CRS Report 98-529, Flat Tax: An
Overview of the Hall-Rabushka Proposal, by James M. Bickley.

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Option of the Current or an Alternative Income Tax System
Proposals of Representative Burgess and Senator Brownback would give
taxpayers the option of either paying taxes under the current income tax or paying a
flat rate income tax.
Legislative Proposals for Fundamental Tax Reform
As of January 30, 2008, in the 110th Congress, nine bills for fundamental tax
reform have been introduced. Representative John Linder’s proposal (H.R. 25) and
Senator Saxby Chambliss’s proposal (S. 1025) would replace our current income-
based tax system and estate/gift taxes with a national retail sales tax. Representative
Michael Burgess’s proposal (H.R. 1040) would allow taxpayers to select a flat tax,
a modified VAT based on the concepts of Robert E. Hall and Alvin Rabushka, as an
alternative to the current income tax system. Representative Phil English’s proposal
(H.R. 4159) would replace our corporate income tax with a subtraction-method VAT,
replace our individual income tax with a consumed-income tax, and eliminate the
estate and gift tax. Senator Richard C. Shelby’s proposal (S. 1040) and Senator
Arlen Specter’s proposal (S. 1081) would replace individual and corporate income
taxes and estate and gift taxes with a flat tax based on the Hall-Rabushka concept.
Senator Ron Wyden’s proposal (S. 1111) would reform the current income tax
system by expanding the tax base and simplifying the tax code. Representative
Chaka Fattah’s proposal (H.R. 2130) would require the Treasury to conduct a study
of the implementation of a transaction fee as a replacement for all existing federal
taxes on individuals and corporations. Senator Sam Brownback’s proposal (S. 2518)
would simplify the individual income tax by allowing each taxpayer the option of
paying a simple, low-rate tax on gross income less an individual tax credit. Although
some of these plans were more detailed than others, none of the proposals had the
level of detail that would be required to make a plan operational. Many difficult
details and transitional considerations had yet to be addressed.
Representative John Linder’s Proposal
H.R. 25. (A companion bill was introduced in the Senate, S. 1025.) The Fair
Tax Act of 2007 was introduced on January 4, 2007, and referred to the Committee
on Ways and Means. This proposal would repeal the individual income tax, the
corporate income tax, all payroll taxes, the self-employment tax, and the estate and
gift taxes and levy a 23% (tax-inclusive) national retail sales tax as a replacement.
Every family would receive a rebate of the sales tax on spending up to the federal
poverty level (plus an extra amount to prevent any marriage penalty). The Social
Security Administration would provide a monthly sales tax rebate to registered
qualified families. The 23% national retail sales would not be levied on exports. The
sales tax would be separately stated and charged. Social Security and Medicare
benefits would remain the same with payroll tax revenue replaced by some of the
revenue from the retail sales tax. States could elect to collect the national retail sales
tax on behalf of the federal government in exchange for a fee. Taxpayer rights
provisions are incorporated into the act.

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Senator Saxby Chambliss’s Proposal
S. 1025. (A companion bill, H.R. 25 was introduced in the House.) The Fair
Tax Act of 2007 was introduced on March 29, 2007, and referred to the Senate
Finance Committee. This act would “promote freedom, fairness, and economic
opportunity by repealing the income tax and other taxes, abolishing the Internal
Revenue Service, and enacting a national sales tax to be administered primarily by
the states.” (See H.R. 25 on the preceding page for a description.)
Representative Michael C. Burgess’s Proposal
H.R. 1040. Freedom Flat Tax Act was introduced February 14, 2007, and
referred to the House Committee on Ways and Means. This proposal would allow
taxpayers to select a flat tax as an alternative to the current income tax system. The
flat tax was based on the concepts of the Hall-Rabushka flat tax proposal. The
individual’s selection of the flat tax would be irrevocable. In the first two years, the
flat tax rate would be 19%, and in subsequent years it would fall to 17%. An
individual engaged in a business activity may elect irrevocably, as an alternative to
our current income tax system, to be taxed on business taxable income that equals
gross sales less the cost of business inputs for business activity, wages, and
retirement contributions. For the first two years, a 19% rate would apply to business
taxable income, but after the first two years, this rate would decline to 17%. This act
would become effective for tax year 2008. This act would repeal the estate and gift
taxes.
Senator Richard C. Shelby’s Proposal
S. 1040. Tax Simplification Act of 2007 was introduced on March 29, 2007,
and referred to the Senate Finance Committee. This act is modeled after the proposal
formulated in 1981 by Hall and Rabushka. This flat tax would levy a consumption
tax as a replacement for the individual and corporate income taxes, and the estate and
gift taxes.
This proposal has two components: a wage tax and a cash-flow tax on
businesses. It is essentially a modified VAT, with wages and pensions subtracted
from the VAT base and taxed at the individual level. Under this proposal, some
wage income would not be included in the tax base because of deductions, while
under a VAT all wage income would be included in the tax base.
Initially the individual wage tax would be levied at a 19% rate, but when the tax
was fully phased in, this rate would decline to 17%. The individual wage tax would
be levied on all wages, salaries, pensions, and unemployment compensation. In
addition, government employees and employees of nonprofit organizations would
have to add to their wage tax base the imputed value of their fringe benefits.
The individual wage tax would not be levied on Social Security receipts. Thus,
the current partial taxation of Social Security payments to high-income households
would be repealed. Social Security contributions would continue to be taxed; that is,
they would not be deductible and would be made from after-tax income. Firms

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would pay the business tax on their Social Security contributions. Individuals would
pay the wage tax on their Social Security contributions. The individual wage tax
would have “standard deductions” that would equal the sum of the “basic standard
deduction” and the “additional standard deduction.”
The “basic standard deduction” would depend on filing status. For tax year
2007, the basic standard deduction would have been the following:
! $25,580 for a married couple filing jointly or a surviving spouse;
! $16,330 for a single head of household;
! $12,790 for a single person; and
! $12,790 for a married person filing a separate return.
The “additional standard deduction” would be an amount equal to $5,510 times
the number of dependents of the taxpayer.
All deductions would be indexed for inflation using the consumer price index
(CPI).
Initially businesses would pay a tax of 19% (declining to 17% when the tax was
fully phased in after December 31, 2009) on the difference (if positive) between gross
revenue and the sum of purchases from other firms, wage payments, and pension
contributions. This business tax would cover corporations, partnerships, and sole
proprietorships. Pension contributions would be deductible but there would be no
deductions for fringe benefits. In addition, state and local taxes (including income
taxes) and payroll taxes would not be deductible.
Activities of government entities and tax-exempt organizations would be
exempt from the business tax.
If the business’s aggregate deductions exceed gross revenue, then the excess of
aggregate deductions can be carried forward to the next year and increased by a
percentage equal to the three-month Treasury rate for the last month of the taxable
year.
Any congressional action that raises taxes would require a three-fifths
(supermajority) vote in both the Senate and the House of Representatives.
Senator Arlen Specter’s Proposal
S. 1081. Flat Tax Act of 2007 was introduced on April 10, 2007, and referred
to the Senate Finance Committee. This act is modeled after the Hall-Rabushka
proposal, which was previously discussed. The Specter flat rate consumption tax
would replace the federal individual and corporate income taxes and the federal
estate and gift taxes.
This proposal has two components: a wage tax and a cash-flow tax on
businesses. It is essentially a modified VAT, with wages, salaries, and pensions
subtracted from the VAT base and taxed at the individual level.

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The individual wage tax would be levied at a 20% rate on all wages, salaries,
and pensions. In addition, government employees and employees of nonprofits
would have to add to their wage base the imputed value of their fringe benefits. The
individual wage tax would have “standard deductions” that would equal the sum of
the “basic standard deduction” and the “additional standard deduction.”
The “basic standard deduction” would depend on filing status. For tax year
2007, the basic standard deduction would have been the following:
! $25,000 for a joint return;
! $25,000 for a surviving spouse;
! $18,750 for a head of household;
! $12,500 for a married taxpayer filing separately; and
! $12,500 for a single taxpayer.
The “additional standard deduction” would be an amount equal to $6,250 times
the number of dependents of the taxpayer. All deductions would be indexed for
inflation.
Individuals would be allowed to deduct up to $3,125 ($1,562.50 in the case of
a married individual filing a separate return) annually for charitable contributions.
Individuals also would be allowed to deduct “qualified residence interest” on
acquisition indebtedness not exceeding $125,000 ($75,000 in the case of a married
individual filing a separate return).
The business tax would be levied at a 20% tax rate on gross revenue less the
sum of purchases from other firms, wage payments, pension contributions, and the
cost of personal and real property used in the business. Purchases from other firms
would include capital goods. If the business’s aggregate deductions exceed gross
revenue, then the excess of aggregate deductions can be carried forward to the next
year and increased by a percentage equal to the three-month Treasury rate for the last
month of the taxable year.
This tax reform act would have become operational for taxable years beginning
after December 31, 2007.
Senator Ron Wyden’s Proposal
S. 1111. The Fair Flat Tax Act of 2005 was introduced on April 16, 2007, and
referred to the Senate Finance Committee. This proposal would reform the current
income tax base rather than changing to a consumption base. This act has three stated
purposes: (1) to make the federal individual income tax system simpler, fairer, and
more transparent; (2) to make the federal corporate income tax rate a flat 35% and
eliminate special tax preferences that favor particular types of businesses or
activities; and (3) to partially offset the federal budget deficit through the increased
fiscal responsibility resulting from these reforms.
The progressive individual income tax would have three rates: 15%, 25%, and
35%. The individual income tax would provide a federal income tax credit for state
and local income, sales, and property taxes. The individual income tax would

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provide for an earned income tax credit for childless taxpayers and a new earned
income child credit; repeal the individual alternative minimum tax; increase the basic
standard deduction and maintain itemized deductions for principal residence
mortgage interest and charitable contributions; and reduce the number of exclusions,
exemptions, deductions, and credits. All income including capital gains and
dividends would be taxed equally. The corporate tax rate would be 35% of taxable
income. The Secretary of the Treasury would be required to report
“recommendations regarding the elimination of federal tax incentives which
subsidize inefficiencies in the health care system.”5 When sufficient information is
available, brokers would be required to report customers’ basis in securities
transactions. Penalties for promoting abusive tax shelters would be increased. The
criminal monetary penalty limitation for the underpayment or overpayment of tax due
to fraud would be increased. This act would sunset after tax year 2012.
Representative Chaka Fattah’s Proposal
H.R. 2130. The Comprehensive Transform America Transaction Fee Act
of 2007 was introduced on May 3, 2007, and referred to the House Committee on
Ways and Means. This act would require the Secretary of the Treasury to conduct a
study and produce a comprehensive analytical report on the implementation of a
transaction fee as a replacement for all existing federal taxes on individuals and
corporations. This transaction fee would apply to all non-cash transactions
(including checks, credit cards, transfers of stocks, bonds, and other financial
instruments) and all high-dollar cash transactions. The fee would not apply to cash
transactions of less than $500, or salaries and wages paid by employers to employees,
or transactions involving individual savings instruments through financial
institutions. The fee would be double, or higher than, the standard transaction fee on
cash withdrawals from financial institutions. The fee would be collected by the seller
or financial institution servicing the transaction. The fee would be set at least at the
level to replace revenues generated under the Internal Revenue Code. A higher fee
could be levied to pay for one or more of the following: elimination of the national
debt over 10 years, a federal revenue sharing program with the states to support 50%
of the K-16 education costs, a plan to meet the promised levels of certain provisions
listed under the National Security Intelligence Reform Act of 2004, a federal health
care program providing insurance coverage for the estimated 45 million uninsured
Americans, an increase in the military basic pay rate to a level comparable with that
of federal civilian pay, a federal revenue sharing program supporting community and
economic development investments in new markets (rural and urban areas) at a level
equal to 10% of current federal tax revenues, a plan to increase the pay for National
Guard and Reserve soldiers to that of active duty military for periods of extended
deployments abroad, and a Social Security and Medicare solvency plan ensuring that
revenues continue to exceed expected outlays. The Secretary of the Treasury would
submit to Congress the results of the study in a comprehensive analytical report not
later than one year after the enactment of this act.6
5 S. 1111, Fair Flat Tax Act of 2007, Section 204.
6 For an analysis of the transaction tax, see CRS Report RL32266, Transaction Tax: General
Overview, by Maxim Shvedov.

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Representative Phil English’s Proposal
H.R. 4159. The Simplified USA Tax Act of 2007 was introduced on
November 13, 2007, and referred to the House Ways and Means Committee. The
corporate income tax would be replaced by a cash-flow business tax (a subtraction-
method VAT). The gross tax base (value-added) would equal gross receipts less
purchases from other firms. The tentative tax would be determined by multiplying
the value-added by the appropriate tax rate. A tax rate of 8% would apply to the first
$150,000 of a business’s value-added, and a tax rate of 12% would apply to all of the
business’s value-added over $150,000. A business tax rate of 12% would apply to
all imports. A credit for the 7.65% employer-paid OASDHI payroll tax (commonly
called FICA or the Social Security tax) would be subtracted from the tentative tax to
calculate the business’s tax liability for the year.
The individual income tax would be replaced by a tax on consumed-income. An
individual’s tax liability would be calculated by (1) calculating gross income, (2)
subtracting exemptions and deductions, (3) applying a progressive rate structure to
the difference, and (4) subtracting a credit for the 7.65% employee-paid OASDHI
payroll tax payments. Gross income would equal wages and salaries plus interest,
dividends, pension receipts, and amounts received from the sale of stock and other
assets. Deductions would be allowed for charitable contributions, home mortgage
interest, and higher education tuition. Deductions would also be allowed for
retirement-oriented 401 (k) contributions and IRAs for lower-income families.
The Simplified USA Tax eliminates the double taxation of savings by allowing
everyone to contribute after-tax income to a USA Roth IRA, which is a universal
savings vehicle. After five years, accumulated principal and earnings on principal
can be withdrawn on a tax-free basis at any time and for any purpose. The federal
estate and gift tax would be repealed.
Senator Sam Brownback’s Proposal
S. 2518. The Freedom to Choose Tax Reform Act of 2007 was introduced
on December 18, 2007, and referred to the Senate Finance Committee. This act seeks
to simplify the individual income tax by allowing eligible individual taxpayers the
option of paying a simple, low-rate tax system on gross income less an individual tax
credit. For tax year 2009, an individual could choose to pay a tax of 10% of gross
income up to $102,000 and 23% of gross income over $102,000. The taxpayer, the
taxpayer’s spouse, and each dependent of the taxpayer would be allowed a credit of
$1,000 against the tax. The gross income levels and credit would be indexed for
inflation. A single individual taxpayer whose gross income exceeds $175,000 for the
taxable year would not be eligible to choose the simplification option. Married
couples would be eligible only if both select the option of paying the simplified tax
and their gross income does not exceed $350,000. This act would be effective for tax
year 2009.

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Other Legislation about Fundamental Tax Reform
As of January 30, 2008, two other bills relevant to fundamental tax reform have
been introduced in the 110th Congress: H.R. 510 and S. 747. Although these two
bills are similar and have the same title, “Tax Code Termination Act,” there are
significant differences in their contents.
H.R. 510 (Representative Bob Goodlatte). Tax Code Termination Act was
introduced on January 17, 2007, and referred to the House Committee on Ways and
Means. After December 31, 2010, this act terminates the tax code except for self-
employment taxes, Federal Insurance Contributions Act taxes, and Railroad
Retirement taxes. This act declares that any new federal tax system should be a
simple and fair system that (1) applies a low rate to all Americans, (2) provides tax
relief for working Americans, (3) protects the rights of taxpayers and reduces tax
collection abuses, (4) eliminates the bias against savings and investment, (5)
promotes economic growth and job creation, and (6) does not penalize marriage or
families. This act requires that the new federal tax system be approved by Congress
not later than July 4, 2010.
S. 747 (Senator Johnny Isakson). Tax Code Termination Act was
introduced on March 2, 2007, and referred to the Senate Finance Committee. This
act establishes within the legislative branch a National Commission on Tax Reform
and Simplification. This act directs the commission to (1) review the Internal
Revenue Code of 1986 and its impact on the economy, families, and the workforce;
(2) determine whether the current income tax system can be replaced by a more
efficient and fair system of taxation; and (3) submit a report to Congress on the
results of its review with recommendations for fundamental reform and
simplification of the code. If a new federal tax system is not approved by July 4,
2010, then Congress would be required to vote to reauthorize the Internal Revenue
Code of 1986.
Tax Reform to Eliminate the AMT
Already in the first session of the 110th Congress, numerous bills were
introduced to eliminate the individual alternative minimum tax (AMT).7 Some of
these bills call for sweeping changes in the tax code.8 In the first session of the 110th
Congress, one of the more significant bills was introduced by House Ways and
Means Committee Chair Charles B. Rangel, The Tax Reduction and Reform Act of
7 For an examination of the alternative minimum tax for individuals, see CRS Report
RL30149, The Alternative Minimum Tax for Individuals, by Gregg A. Esenwein and Steven
Maguire.
8 For information about proposed AMT legislation, see CRS Report RS22563, The
Alternative Minimum Tax for Individuals: Legislative Initiatives in the 110th Congress, by
Gregg A. Esenwein and Steven Maguire.

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2007 (H.R. 3970).9 Although a temporary patch for the AMT was passed at the end
of the first session of the 110th Congress, the issue of AMT reform remains and will
likely be debated in the second session.
Reform of the Business Income Tax
Some tax reform proposals would lower the marginal corporate income tax rate
and broaden the corporate income tax base.10 Other tax reform proposals would
replace the corporate income tax with some other form of taxation.
During the first session of the 110th Congress, the Treasury released two major
studies concerning corporate tax reform: “Business Taxation and Global
Competitiveness,” and “Approaches to Improve the Competitiveness of the U.S.
Business Tax System for the 21st Century.” These studies may be the basis for
legislation in the second session of the 110th Congress.
Report on “Business Taxation and Global Competitiveness”

On July 23, 2007, the U.S. Department of the Treasury held a conference on
“Business Taxation and Global Competitiveness.” The Treasury released a
background paper, which argued that
The current business tax base includes an array of special provisions that
reduce taxes for particular types of activities, industries, and businesses. These
provisions take the form of exclusions from income, deductions allowed or
enhanced from what otherwise would be allowed, preferential tax rates, income
deferral, and tax credits. Some of these provisions are intended to ease tax
compliance and administration, such as allowing cash accounting for small
corporations, but others were intended by Congress to encourage particular types
of activity. The premise underlying many of the special provisions is that they
promote activities that have spillover effects, or address various externalities or
market failures. Unwarranted tax subsidies may lead to the misallocation of
capital, as they encourage investment decisions based on tax characteristics
rather than economic fundamentals, and generally reduce economic growth.
Together, these provisions substantially narrow the corporate tax base,
which requires that tax rates be higher in order to raise the same tax revenue. For
example, it is estimated that these special corporate tax provisions narrow the
corporate tax base by roughly 25 percent. If the tax base were broadened by
removing these special provisions, the top corporate tax rate of 35 percent could
9 For an overview of the bill, see CRS Report RL34249, The Tax Reduction and Reform Act
of 2007: An Overview, by Jane G. Gravelle.
10 For an analysis of some important issues concerning corporate tax reform, see CRS Report
RL34229, Corporate Tax Reform: Issues for Congress, by Jane G. Gravelle and Thomas L.
Hungerford.

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CRS-14
be reduced to 27 percent, or, as an alternative, about 40 percent of investment
costs could be written off immediately (i.e., expensed) by all businesses.11
The Treasury states that the United States has the second highest statutory
corporate tax rate among countries in the Organization for Economic Cooperation
and Development (OECD, an organization consisting of most developed countries).12
The Treasury maintains that broadening the corporate tax base and reducing the
statutory corporate tax rate would improve the global competitive position of the
United States.13
Report on Competitiveness of the U.S. Business Tax System
On December 20, 2007, the U.S. Treasury issued a report titled Approaches to
Improve the Competitiveness of the U.S. Business Tax System for the 21st Century.14
This report was a follow-up to the July 26th conference report. It stated,
Three broad approaches for reforming the U.S. business tax system are outlined:
(1) replacing business income taxes with a business activities tax (BAT), a type
of consumption tax, (2) eliminating special business tax provisions coupled with
either business tax rate reduction or faster write-off of business investment,
potentially combined with the exemption of active foreign earnings, and (3)
implementing specific changes that focus on important structural problems
within our business tax system. Rather than present a particular
recommendation, this report examines the strengths and weaknesses of the
various approaches. The various policy ideas discussed in this report represent
just some of the approaches that could be considered. This report does not
advocate any specific recommendation nor does it call for or advance any
legislative package or regulatory changes.15
The proposed business activities tax (BAT) is a subtraction-method value-added tax
(VAT). Under this method, each firm in the economy calculates its value added by
subtracting its cost of taxed inputs from its sales. Next, the firm determines its VAT
liability by multiplying its value added by the VAT rate.16
11 U.S. Department of the Treasury, Treasury Conference on Business Taxation and Global
Competitiveness, Background Paper, Washington, July 23, 2007, p. 7.
12 Ibid., p. 35.
13 Ibid., p. 1.
14 U.S. Department of the Treasury, Office of Tax Policy, Approaches to Improve the
Competitiveness of the U.S. Business Tax System for the 21st Century, Dec. 20, 2007, 116
p.
15 Ibid., p. ii of executive summary.
16 For an explanation of a subtraction-method VAT, see CRS Report RL33619, Value-Added
Tax: A New U.S. Revenue Source? by James M. Bickley.

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