If you ask an average American what policies from the Donald Trump administration they’re paying attention to, or care about, chances are they’ll answer with something like “building the wall” or “banning Muslim immigrants” or “repealing Obamacare” or “cozying up to Russia.”

If you ask corporate lobbyists, though, odds are pretty good that one of the first things they’ll mention is border adjustment.

Congressional Republicans, overseen by Speaker Paul Ryan and led by House Ways and Means Committee Chair Kevin Brady, are planning a major overhaul of corporate taxes, as unveiled in their “A Better Way” plan from June.

Naturally, that overhaul includes a big cut in the tax rate, from 35 percent to 20 percent. But it also includes some huge changes in the way the corporate tax works, apart from its overall level. They want to push companies away from financing projects with debt, by making it impossible for them to deduct interest payments on loans. They want to add breaks for companies making big capital investments (like buying equipment or building factories), making those totally deductible in the year they’re made rather than “depreciable” over time.

But perhaps most dramatically of all, they want to allow companies to totally exclude revenue from exports when calculating their tax burden, and to ban them from deducting the cost of imports they purchase.

The plan is a very clever way to address the political goals of both House Republicans and Donald Trump. The president-elect has made it clear he wants a populist trade policy that’s tough on imports and backs exporters. And while its actual effects on trade are milder than you might expect, the House GOP border adjustment plan offers Trump something that sounds like a populist trade policy without resorting to actual tariffs. Meanwhile, House Republicans have wanted a major corporate tax cut for years, and border adjustment, by increasing taxes on imports, raises lots of revenue and makes it easier to afford a huge rate cut.

But that doesn’t mean the policy is a sure thing. It’s already made some major corporate players — including retailers, which depend heavily on imports, as well as Koch Industries — into skeptics of Republican tax reform efforts, earning the GOP some powerful enemies as it begins its first major effort to remake the tax code in 14 years.

How border adjustment works

To see how big a change this would be, it helps to imagine two US-based companies. One of them makes most of its money from exporting US-products abroad, and the other makes most of its money from importing products and then selling them to US consumers. Let’s call them ExpCo and ImpCo. (Thanks to Kyle Pomerleau at the Tax Foundation for this example, which I’ve borrowed with some alterations.)

Suppose, for ease of illustration, that ExpCo and ImpCo each earn $1,000 a year in revenue from selling their products. ExpCo spends $800 a year buying component parts for its products, meaning it makes a $200 profit. ImpCo spends $800 a year buying imported products from abroad, so it also makes a $200 profit.

The way the corporate tax works now, those profits would (all else being equal) be treated the same: Each would be subject to a 35 percent tax rate, so both companies would pay $70 a year in taxes and have $130 in after-tax income.

But border adjustment changes the math dramatically. ExpCo makes all of its revenue from exporting its products, but because that revenue would be exempt, its taxable revenue would be $0 and its taxable income would fall to -$800. Under the new 20 percent tax rate, it’d get a rebate of $160 from the government. The Republican plan gives ExpCo a tax cut of $230.

ImpCo, by contrast, would still be accountable for all its revenue, but also would not be allowed to deduct the $800 it spends on imported goods. Its taxable profit would spike to $1,000, and even with the lower tax rate, it’d face a bill of $200, eating up all its profits.

Why economists and retailers disagree on the change’s impact

ImpCo and ExpCo are fictional, but their predicaments loosely fit those of a lot of real companies. Boeing, for instance, makes a large share of its revenue from selling planes abroad. It would benefit, just like ExpCo would. Walmart, by contrast, imports an enormous share of the products it sells to American consumers. Not being able to deduct imported goods would dramatically change its tax situation.

That’s why retailers are revolting against the idea of border adjustment. As David French, the head lobbyist at the National Retail Federation, told Politico, “Our members have told us that the import tax could be as high as five times their profits. I don't know how viable some retailers would be in the face of this import tax."

Barney Jopson of the Financial Times reported, “Senior lobbyists who sometimes struggle to get the attention of company leaders told the Financial Times they were receiving calls from chief executives with orders to fight the tax plan, which some importers say threatens to wipe out their profits.” Walmart, Best Buy, Target, and Walgreens have all been meeting with Ways and Means Chair Brady’s office about the issue, according to Bloomberg BNA reporters Aaron Lorenzo and Kaustuv Basu.

Koch Industries — the second-largest private company in America, and the source of the fortunes of the politically influential Koch brothers — has come out against border adjustment as well, saying it would “adversely impact American consumers by forcing them to pay higher prices on products produced in and goods imported to the U.S. that they use every single day.” The company claimed in a statement that it, individually, would “greatly benefit” from the tax change, because it produces so much domestically, but was opposing it for its wider economic ramifications.

But most economists think the impact on retail is greatly exaggerated. That’s because they expect that currency markets would adjust in reaction to the change. The new tax on imports would reduce demand for imports from US consumers. When they buy imports, consumers provide foreigners with dollars; doing less of that means fewer dollars being exchanged, and a lower supply of dollars means the value of the dollar, relative to other currencies, will increase.

The tax change also subsidizes exporters. That means US exporters will be able to drop their prices to better compete internationally, increasing demand for exports. That means foreigners buying US exports will need more dollars, which increases demand for dollars and increases the value of the dollar still further.

According to textbook economic theory, this increase in the value of the dollar should totally offset the effects of the import tax and export subsidies, leaving the trade balance where it was previously. Think back to ImpCo. If the dollar appreciates by 25 percent and other currencies fall by 20 percent in response to the 20 percent import tax, then the cost of ImpCo’s imported goods would fall from $800 to $640. The company would still have to pay $200 in taxes, but it would gain $160 in after-tax profit thanks to the exchange rate adjustment. With the lower corporate tax rate, that’s higher than the $130 in after-tax profit it got before. Despite the border adjustment, ImpCo is slightly better off than it was before the tax change.

Conversely, ExpCo would see its revenues from exports fall from $1,000 to $800 due to the increased cost of buying stuff in dollars. That wipes out its pre-tax profit entirely — but thanks to the rebate border adjustment provides, its after-tax profit would go up to $160. That’s identical to ImpCo’s after-tax profit following the changes. Just as before the shift, ExpCo and ImpCo are left exactly as well off as each other.

Of course, the real world is more complicated than the simplest textbook model, and the currency adjustment process might not always be smooth. But even a more nuanced analysis reaches similar conclusions. “Under more realistic assumptions, a border adjustment could have some economic effects, but those effects would still not include a permanent increase in exports or a permanent reduction in imports,” AEI’s Alan Viard, an economist focused on tax issues, wrote in 2009.

If you want to see how this works, the Open Source Policy Center at AEI has a handy calculator that lets you model how border adjustment would affect a sample firm with $100 in sales, using different assumptions about currency adjustment.

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Other reasons to like border adjustment

The idea of border adjustment has surprisingly bipartisan appeal. Congressional Republicans are pitching it as a way of living up to Donald Trump’s trade agenda, which looks to reduce the trade deficit and boost exporters. If the economists’ consensus view is correct, this is misguided; border adjustment won’t change the balance of trade one way or another. But if the retailers and others worried about the change are right, it would have a real effect, and regardless of its actual effects it’s a rhetorical way to “get tough” on trade.

But some Democratic-leaning tax experts have expressed enthusiasm for the idea in the past because of its potential to deter tax evasion. Alan Auerbach, an economist at UC Berkeley, worked out a detailed proposal for a border-adjusted corporate tax back in 2010 in a paper for the Center for American Progress and the Hamilton Project, two institutions with links to the Obama administration and the Democratic Party establishment more broadly. The center-left Century Foundation issued a report from University of Michigan law professor Reuven Avi-Yonah in November calling for a similar system.

The issue is that the corporate tax, in its current form, taxes companies on both profits they earn at home and those they earn abroad — but taxes on the latter are deferred until the money’s brought home. That provides a big incentive to try to shift profits from sales in the US overseas to evade US taxes. Clever companies can even shift profits around further to avoid taxes in foreign countries, as in the case of the infamous “Double Irish Dutch Sandwich” move that Apple and other companies have used for years (and which Ireland is finally cracking down on).

These kinds of shenanigans would be much harder with border adjustment, because it makes the tax about where goods and services are bought, not where their profits go. “With a destination-based tax, this incentive disappears because the very transactions that make profit shifting possible are ignored,” Pomerleau and Stephen Entin at the Tax Foundation explain. “For example, if a business understates profits in the US by understating the cost of widgets it sells to a subsidiary in France, it wouldn’t matter because that transaction would be ignored because it is an export. Likewise, if a foreign subsidiary overstates the cost of lumber it imports to the United States, it, again, doesn’t matter because that cost is not deductible against the corporate tax base.”

Border adjustment might violate international law

In conjunction with the immediate deductibility of capital investments, border adjustment would move the corporate tax to being much closer to a consumption tax. Its tax base is all goods bought and consumed in the US — whether they’re imports or produced domestically — and goods sold abroad are excluded.

Indeed, the only difference between a corporate tax with border adjustment and investment deductibility and a value-added tax (VAT) is that in the latter, corporate spending on wages and other worker compensation isn’t deductible.

So why don’t Republicans just propose a VAT? Well, some have. Ted Cruz and Rand Paul both ran on VAT plans that they refused to refer to as VATs during the 2016 primaries. But they were attacked for that by rivals, with Marco Rubio pointing out that European social democracies like VATs too. Perhaps an even more potent political downside is that everyone knows VATs are sales taxes and fall disproportionately on the poor — especially on people whose consumptions outstrips their income (middle-class retirees spending down their savings, for example). No Republican wants to run on telling right-leaning seniors that their pensions and Social Security are now going to be worth a lot less due to a new sales tax.

The effects of the not-quite-a-VAT that Brady and other House Republicans are proposing will probably be quite similar (though less regressive, since it doesn’t tax wages), but it’s different enough to defuse some of the political obstacles that come with straight-up proposing a VAT.

On the other hand, a VAT would be the sounder course legally speaking. Under World Trade Organization rules, VATs are allowed to be border-adjusted but income taxes are not — this is supposed to prevent using the tax code to covertly funnel trade-distorting subsidies.

In economics terms, there’s little reason to believe the Brady plan and a border-adjusted VAT would impact trade differently. There’s nothing magical about VATs not deducting wages that changes the trade balance. Indeed, some like Michigan’s Avi-Yonah have argued that the Brady plan is a VAT for WTO purposes despite the wage deduction. But the prospect of possible WTO sanctions could make it harder for wavering House and Senate members to support a border adjustment plan all the same.