The rotten core of the US tax system is how it treats overseas business earnings. Large American companies hold nearly $1 trillion overseas, and it’s not taxed as long as the money stays abroad. Republicans want to make that tax holiday permanent. To do so, they’ll give 14% of middle-class families earning between $50,000 and $200,000 a tax hike next year.

Why does the GOP want to stop taxing American companies’ foreign profits?

In the Republicans’ view, the main reason companies keep earnings overseas is America’s top corporate tax rate of 35%, the highest in the developed world. They argue that lowering the rate to 20% will convince multinationals to bring their tax-free earnings back from overseas to invest in the US.

Does that argument hold water?

Past experience says no. Companies might bring money back to the US but give it to shareholders instead of investing it, as they did after a tax holiday in 2004. Or they might invest it in the US, but in automating their factories rather than paying factory workers. Or they might just keep it abroad and invest in China and other growing markets, where the returns on investment could be higher than in the US. But most importantly, it’s missing the problem of profit-shifting, when companies move domestic earnings over-seas to avoid taxes.

Is there a good argument for cutting corporate taxes to bring back money from abroad?

Yes. All things being equal, a permanently lower corporate tax rate that doesn’t increase the national debt would make the US a more attractive place to invest, benefitting the entire economy. Economists aren’t sure how big that effect is—the White House cites a 1994 paper (pdf) that found that each percentage point decrease in the corporate tax rate leads to an increase in companies’ reported income by 2.25 percentage points. A more recent Oxford University review found much smaller effects, though it does note that profit-shifting is most affected by statutory tax rates.

The problem is, as economist Gabriel Zucman writes in The Hidden Wealth of Nations, tax havens hide funds from both tax collectors and economic researchers. No matter which way you slice it, a tax rate of 0% is still much lower than a tax rate of 20%. If companies had an incentive to keep their profits offshore when they could defer taxes, they’ll have even more of an incentive to do so if the taxes are abolished altogether. For one thing, it gives them flexibility, knowing they can always bring the money home if they need to. For another, they wouldn’t even need to report the money to the US government, saving a lot of accounting headaches.

Then how could anyone claim to believe this plan is a good idea?

It’s clear from the behavior of the tax-reform-writing Republicans themselves that they recognized the risk that their plan would cause more money to leave the country. To prevent this, the plan as originally conceived by Kevin Brady, one of its key architects, imposed a kind of corporate consumption tax known as border adjustment.

Essentially this would tax companies on their cash flows rather than on their income, so they wouldn’t have an incentive to hide their profits overseas or in complicated accounting structures. Arguably, this plan would have boosted investment in the US, by cutting the domestic tax rate while penalizing companies that rely heavily on international supply chains and foreign subsidiaries.

OK, so there was a safeguard.

Yes, and the idea of a border adjustment tax appealed to policy wonks. But it incensed companies that rely heavily on imports, like Wal-Mart and oil refiners, because it would have meant higher prices on their imported goods. Instead, the current tax reform plan is less radical—it just cuts tax rates and exempts foreign income.

However, if that were all, there would be little to stop even largely domestic companies from shifting their intellectual property to an overseas subsidiary. They could send profits overseas tax-free as a licensing fee, while deducting the payments from their US tax bill as a business expense. So to prevent this, Brady’s team wrote a provision into the bill—a 20% excise tax on payments from US companies to related firms in foreign countries.

So the safeguard was thrown out—but they wrote a new safeguard.

Yes. But multinationals that rely on schemes like that to shift profits overseas—from tech firms to pharmaceutical giants to auto-makers—were not happy with it. The excise tax was “the atomic bomb in the draft,” according to accounting firm EY’s Washington lead, Ray Beeman.

So last week, House lawmakers stripped the excise tax out of the bill, at a cost of more than $150 billion, according to the Joint Tax Committee (paywall). This implies a forecast $750 billion in untaxed payments heading out of the country in the next decade. Meanwhile, the Senate did not even bother to include a measure to tax this money in its bill.

OK. So a tax bill with no safeguard against companies taking their money out of the US is now going to be rammed through Congress?

The problem now is that neither the Senate nor the House bill complies with a vital budget rule named after the late senator Robert Byrd. The Senate can pass a tax cut with a simple majority of votes, which prevents Democratic senators from filibustering it (stymieing it with procedural delays), but the Byrd rule says that any bill passed this way must not increase annual borrowing after 10 years.

Bad news for the similar tax bills in both chambers: They increase the deficit by quite a bit in 2028—by as much as $155 billion. Republicans aren’t going to able to pass a bill that the Democrats filibuster, so instead they’ll need to modify the bill to follow the Byrd rule.

How could they modify the bill to follow the Byrd rule?

Two possible ways come to mind: reduce the tax cuts for the Trump class—say, by not repealing the estate tax, not cutting taxes on business income from partnerships and trusts, or not cutting the alternative minimum tax—or cut back on the largesse for corporations.

Will they do that?

Seems unlikely. Just look at how the tax bill has been paid for so far: The bill raises taxes on individuals by some $3 trillion, mostly by closing off deductions. Policy wonks like the idea of closing or limiting some deductions, like those for mortgage interest, that distort the economy. But this bill also goes after tax benefits for adoptions, medical expenses, student loans, and most controversially, paying state and local tax.

That is why in the first year of its existence, the Senate bill actually raises taxes on one in 10 middle class families, according to JTC estimates obtained by the Wall Street Journal. By 2027, it hikes taxes on nearly two-in-10 middle class families. The final House bill would raise taxes on 30% of middle-class families in 2027, according to the Tax Policy Center.

This already makes the bill politically dicey, and when it changes to meet the Byrd rule, it’s likely to get worse.

Are there no other options?

Faced with a choice of paring back the benefits to powerful companies, or finding ways to squeeze more money out of the individual code, it’s easy to see where Republicans might land. There is a third way: Writing the bill so that enough of the tax cuts expire before the 10-year window, avoiding the Byrd rule. That was how president George W. Bush passed his tax cuts. But this would put the lie to claims that the plan is about spurring economic efficiency. Expiring tax plans don’t provide clear incentives for investments—they’re simply a windfall for the beneficiaries.

So what next?

Despite the rosy view among House Republicans about the bill’s future, they have yet to decide between middle class families, multinational companies—and their own political futures.