March 1996 Fact Sheet
Tax Reform Proposals: What They Mean for Employee Benefits
Armey-Shelby Proposal: The Freedom and Fairness Restoration Act of 1995 (H.R. 2060/S.
1050) -- The flat tax proposal introduced by Rep. Dick Armey (R-TX) and Sen. Richard
Shelby (R-AL) would lower all tax rates (to 20 percent immediately and to 17 percent after
12/31/97) and allow employers to deduct the cost of business inputs, cash wages, and
retirement contributions to defined benefit and money purchase plans. All employers
(including tax-exempt employers in the public and private sector) would have to pay taxes
on the value of noncash compensation other than retirement contributions. Interest,
dividends, and other investment returns would not be subject to taxation. For example, an
employer providing health insurance would pay tax (income and FICA) on the value of the
- Domenici-Nunn Proposal: USA Tax Act of 1995 (S. 772) -- Also known as "The
Unlimited Savings Allowance Plan," the proposal of Sen. Pete Domenici (R-NM) and Sen.
Sam Nunn (D-GA) would combine an 11 percent value-added tax (VAT) on business, with
graduated consumption tax rates, up to 34 percent, on individuals on the annual aggregate
value of consumption expenditures. The proposal would allow limited individual deductions
for charity, mortgage interest, and education. It would allow unlimited deductions for
additions to savings. In addition, earnings on assets would not be taxed immediately.
Taxation would occur only when savings and earnings are spent.
- Archer National Sales Tax -- Rep. Bill Archer (R-TX), chairman of the Ways and Means
Committee, has advocated eliminating the income tax and replacing it with a broad-based
tax on the purchase of goods and services. Archer set forth five "guiding
lights" for reform. First, to achieve simplicity and freedom from the Internal
Revenue Service as it exists today, all loopholes in the tax code would be eliminated.
Second, the new system would be made savings friendly by ending the taxation of interest
earned and investments. Third, the "underground economy" would be curtailed by
taxing the purchase of goods and services. Fourth, international competitiveness would be
improved by removing the tax from U.S. goods sold overseas and adding it to imported
goods. Fifth, to assure fairness, those able to spend more would pay more in taxes.
- Gephardt Proposal -- Rep. Richard Gephardt's (D-MO) proposal differs from the other
proposals by providing an income tax with full taxation of interest, dividends, and
capital gains, with progressive rates, and with the elimination of virtually all
deductions except the mortgage interest and standard deductions. His proposal, as
currently stated, would eliminate the favorable tax treatment of all employment-based
health and pension programs by providing for immediate taxation of either the employer or
Definitions of Terms Used in the Table --
Taxable -- the item is considered fully taxable income to the individual.
Deductible -- the item is considered to be eligible for deduction from the individual's
and the employer's taxable income.
After tax -- the service is purchased with dollars after income and other taxes are paid.
Deferred -- the item is not included in taxable income for the current year but can be
taxed at a later year.
When spent -- means that the income is not directly taxed but a tax is paid when a good or
service is purchased with the income.
Tax credit -- the Nunn proposal provides that you would get a credit against income taxes
for FICA tax payments, rather than paying income tax on the income that you paid in FICA
These bills and proposals are in development and are current as of this fact sheet's
writing. Nothing herein is to be construed as necessarily reflecting the views of the
Employee Benefit Research Institute (EBRI) or the Employee Benefit Research Institute
Education and Research Fund (EBRI-ERF) or as an attempt to aid or hinder the passage of
any bill pending before Congress.
For more information, contact Ken McDonnell, (202) 775-6342; Paul Yakoboski, (202)
775-6329; or Dallas Salisbury, (202) 775-6322.
Source: Dallas Salisbury, "Employee Benefits in a Flat Tax or Consumption Tax
World," EBRI Notes (September 1995): 1-12.