Tax reform will be a priority in the first 100 days of the Trump administration. And a surprising point of agreement between Trump and the more free-trade-oriented congressional Republicans may be an overhauled corporate income tax that applies to imports but not exports. The idea appeared in House Speaker Paul Ryan’s blueprint last year, and while it hasn’t received Trump’s formal blessing, it would seem to appeal to his instincts.

According to many economists, while the plan would seem to hammer imports, it wouldn’t actually do so—meaning that Trump and the free traders could both support the policy based on completely different assumptions about its effect. Even some Democrats might get on board; the liberal Center for American Progress published a paper in 2010 advocating much the same thing.

Here’s a primer on how this “destination-based cash-flow tax” is supposed to work, the substantial risks involved, and the powerful opposition to it.

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Our corporate tax system is a mess—and wildly out of step with those used by other countries. Most countries use “territorial” systems, meaning their corporations pay taxes on the money they earn within the country, but not when they repatriate money from foreign subsidiaries.

The U.S., by contrast, taxes companies headquartered here on their worldwide income. Corporations receive a credit for the taxes they paid overseas, but since the U.S. has a high corporate rate (up to 35 percent), they still can be assessed at high rates. Further, the tax applies only when companies bring their money back to the U.S., so a company can avoid it by reinvesting its profits in foreign operations rather than repatriating them. It also encourages companies to relocate their headquarters to lower-tax countries, the dreaded “inversion.”

Needless to say, these are not positive incentives. The Republicans’ plan encompasses five key provisions, four of which have relatively little to do with trade:

  • The corporate tax rate would drop to 20 percent.
  • Repatriated income would no longer be taxed.
  • When businesses buy new equipment, they would be able to deduct the full cost in year one, rather than the current system of “depreciation” over specified numbers of years for various investments.
  • Businesses could no longer deduct interest paid on loans. (This deduction favors debt financing over equity.)

The fifth change is the most interesting: the tax would be “border-adjusted.” The idea is to turn the corporate income tax into a kind of consumption tax—or, perhaps more accurately, to assess corporate income taxes based on the location of the consumption that produces the income to be taxed. Thus, the tax would apply to earnings related to products consumed in the United States, regardless of where those products were made, but it wouldn’t apply to anything consumed elsewhere, even if it was made on American soil. Economically, it is quite similar to the “value-added taxes” (VATs) common throughout the world.

Under the GOP’s plan, companies could no longer avoid taxes by rejiggering their operations and redirecting their profits, and a complex web of regulations designed to keep them from doing so would be rendered unnecessary. Earnings based upon goods sold here would be taxed here, period. That would include goods imported into the United States from foreign manufacturers—and would involve taxing imports that currently aren’t taxed unless tariffs are imposed.

This border-adjustment concept would raise an estimated $1 trillion over a decade, thanks to the fact that the U.S. imports far more than it exports. This makes it an important money-raiser for the GOP plan (which is projected by experts to reduce government revenue considerably).

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This may sound benign, but it is a radical departure from current law.

Today’s corporate income tax targets profits, so companies are allowed to deduct the cost of any inputs they purchase—the so-called cost of doing business—whether those inputs are made in America or imported from abroad. And of course, profits are profits whether the buyers are foreign or domestic.

To make the tax target domestic consumption, cross-border sales would be treated completely differently. Put simply, we can say that revenue from imports would be taxed while revenue from exports would be tax-free; thus, the distinction is based on where consumption takes place. This has numerous implications, some of which could be politically incendiary.

Businesses that import products to sell domestically will lose an enormous tax deduction: the cost of imports, a big chunk of their business expenses, would no longer be written off as a cost of doing business. Retailers, for instance, warn that the new tax, absent the traditional deductions, could be five times their profits.

Exports, by contrast, won’t be taxed at all. In fact, heavy exporters like Boeing will have negative tax liability. In order for the tax to function correctly, these exporters need to be able to deduct the same costs that other businesses can, such as for non-imported inputs, and those with negative liability will need to be given rebates. (For example, if Exporter Inc. buys inputs from another domestic company, that other company will pay the tax and pass it along to Exporter Inc.—whose exports then won’t be truly tax-free unless it receives a rebate.)

In other words, the government will be writing checks to some corporations that don’t pay taxes, while other companies aren’t able to write off the basic costs of doing business. Border adjustment is standard for VATs, and it is necessary if the goal is to tax domestic consumption. But it’s not hard to see how the simple principle behind any consumption tax, including the state sales taxes that Americans pay without complaint—what’s sold here is taxed here—can become divisive when implemented this way, as a shift from a very different system.

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Trump has complained about this feature of VATs in the past, saying it is a way for other countries to tax our exports. Thus, border adjustment would seem to be a way for Trump to “retaliate” without sparking a trade war. Other countries can’t very well complain if they, too, have border-adjusted taxes.

But is Trump right about the economics? Many experts say no.

When a country enacts border adjustment, its currency becomes more valuable as other countries respond to the new situation (i.e., buying more U.S. exports and selling less merchandise here). In fact, if the tax is set up correctly, the currency becomes more valuable in exact proportion to the border adjustment, soon enough leaving trade right back where it started. Seen from the standpoint of a domestic company, imports become cheaper because they are purchased with stronger dollars, while exports suffer from the fact that foreign purchasers’ currency is weaker—and these effects perfectly offset the seeming costs and benefits (respectively) of border adjustment.

Many economists, seeing this as flowing strictly from economic theory, insist border adjustment will have no serious impact on trade. “Border adjustments are not trade policy,” write two of them. But it’s not clear that things would actually turn out this way.

While there’s little doubt that border adjustment would make the dollar more valuable, numerous analysts doubt it would completely offset the change. If these fears become reality, the plan really would punish importers and help exporters, which may be fine with Trump but is certainly not okay with free traders, powerful business interests, or consumers seeing higher prices. Those with a direct stake in the matter—businesses that rely heavily on imports and would lose the ability to deduct them—view the idea as seriously threatening and may have the political clout to kill the plan.

Another major hurdle comes from the World Trade Organization. As mentioned, the GOP’s plan is economically quite similar to the VATs that many other countries use. The WTO, however, makes a distinction between “indirect” taxes like VATs and “direct” taxes like income taxes. (A VAT is “indirect” because it’s a tax on consumers that is collected from the businesses that serve them; income taxes are “direct” because they apply directly to the income or profits of the entity that pays them.) The organization could find that, despite its similarities to a VAT, the GOP’s overhaul of the corporate income tax is still an income tax—and thus not border-adjustable under the current rules.

Of particular concern is the one economically important difference between a VAT and the GOP plan—namely, the ability to deduct payroll expenses in the latter. This could be called discriminatory because it is not available to companies that don’t have payroll expenses in the U.S. In other words, it’s a subsidy for the employment of Americans.

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Border adjustment is a major change that can have any number of effects, many of which no one may foresee. It could affect the developing world, foreign investments, and “quasi-exporters” that serve visitors to the U.S., to name but a few. So it is difficult to fully weigh the tradeoffs.

But some things are certain. If border adjustment is part of a tax-reform package this year, the package will draw intense fire from major importers. And if Republicans drop the issue, they’ll need to find another way to raise the money—and another way to mollify Trump on trade.

Robert VerBruggen is managing editor of The American Conservative.