Fiscal Forecast: US Taxation Index and Debt Markets in Focus

Is the US trending toward a more favorable tax environment?

Doug Crescenzi

22 May 2025 — 5 min read

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TL;DR:

Unveiling the US Taxation Index, a new tool tracking tax policy direction using weighted prediction markets.
High odds for tax cuts in 2025 (95% for Trump cuts) but low likelihood of abolishing federal income tax (5%).
Real-world impact includes potential economic boosts from lower taxes or revenue gains from higher taxes, affecting inflation and competitiveness.
Weighted index smooths volatile market data, offering traders, policymakers, and journalists a clearer fiscal outlook.
Long-tail markets like another US debt downgrade (13%) highlight fiscal risks tied to debt ceiling debates.

Market Snapshots

Event Breakdown

US Taxation Index: This week, we unveil our new US Taxation Index, a unique tool leveraging weighted prediction market data to track the direction of US tax policy. Currently at 38.6%, this index synthesizes markets across federal income taxes, corporate income taxes, capital gains taxes, taxes on tips, and municipal bond taxes, offering a clear signal on whether the US is trending toward a more favorable tax environment (lower taxes) or a more unfavorable one (higher taxes). By weighting markets based on time horizon (near-term events prioritized), impact severity (revenue-driven), and market liquidity/volume, the index distills complex trader sentiment into a single metric.

The index tracks key markets to capture tax policy trends. For instance, on the federal income tax front, markets like “Trump cuts taxes in 2025?” at 88% and “Will the IRS collect more taxes this year than last? (NO)” at 1% reflect sentiment on individual and systemic tax changes.

Corporate tax odds, such as “Will Trump cut corporate taxes in 2025?” at 23%, signal potential business tax relief.

Capital gains markets, including “Will Trump cut long term capital gains tax in 2025?” at 41%, hint at investment tax shifts.

While “Trump ends taxes on tips in 2025?” at 88%% and “Will Trump remove municipal bond tax exemption in 2025?” at 21% highlight niche but impactful areas

These markets, weighted by revenue—federal income tax ($2.18-$2.4 trillion annually), corporate income (~$413-$530 billion annually), and smaller categories like tips ($6.2 billion to $7.9 billion annually)—provide a comprehensive view of tax policy momentum.

The real-world implications are profound. A rising index, indicating lower taxes, could spur economic activity by boosting consumer spending and corporate investment. For example, if corporate tax cuts materialize, businesses might see billions in savings, potentially fueling expansion and job growth. Lower taxes on tips could increase disposable income for service workers, impacting sectors like hospitality. Conversely, a declining index suggests higher taxes, which might constrain economic growth but increase government revenue for public programs. Such shifts could influence inflation, interest rates, and even global competitiveness, as higher taxes might deter foreign investment while lower taxes attract it.

For macro traders and forecasters, the index is a leading indicator. A trend toward tax cuts might lift equities, while rising tax odds could pressure bond yields—traders can position accordingly. Policymakers benefit by gauging market reactions to proposed tax reforms, aiding legislative strategy. Journalists can use the index to frame tax policy debates with data-driven context, moving beyond speculation.

The weighted index approach adds significant value. Individual markets can be volatile—low-liquidity ones like municipal bond taxes might swing on sparse trades. By aggregating and weighting them, prioritizing high-revenue categories like federal income tax, the US Taxation Index smooths these distortions. This reveals nuanced trends, such as optimism in corporate tax cuts versus stagnation in capital gains reforms, offering a clearer picture of tax policy direction. As news unfolds—budget announcements or legislative votes—the index adjusts in real-time, empowering readers to anticipate fiscal shifts and their broader economic impact in 2025.

Related markets & forecasts:

Long-Tail Radar

This week’s Long-tail Radar highlights four interconnected markets on Polymarket that signal potential shifts in the US fiscal landscape, amid record-high debt and deficit levels and Moody’s recent downgrade of the US credit rating. These markets—"US defaults on debt in 2025?" with $29,656 in volume, “Another US debt downgrade in 2025?” at 13%, "Debt ceiling raised or suspended before June?" with $87,861 in volume, and “Will the next reconciliation bill lift the debt ceiling in 2025?” with $1,546 in volume—offer early indicators for traders and forecasters navigating fiscal policy uncertainties.

The “US defaults on debt in 2025?” market, currently at 3%, reflects trader sentiment on the risk of a historic default. With $29,656 in volume, its modest but growing interest underscores concerns over the US’s ballooning debt, now exacerbated by Moody’s downgrade. A spike here could foreshadow volatility in broader markets, such as Treasury yields or currency markets, as default fears ripple through global finance. Similarly, “Another US debt downgrade in 2025?” at 13% tracks the likelihood of further credit rating erosion. A rise in this market might signal deteriorating confidence in US fiscal health, potentially impacting bond markets and borrowing costs.

The “Debt ceiling raised or suspended before June?” market, with $87,861 in volume and sitting at 1%, captures near-term legislative action. Its higher volume reflects active trader focus on this critical deadline, as failure to lift the ceiling could trigger default risks, tying directly to the default market. Meanwhile, “Will the next reconciliation bill lift the debt ceiling in 2025?” at 81% and $1,546 in volume offers a longer-term lens. A shift here could indicate legislative momentum, influencing markets tied to government spending or economic growth, such as equities or inflation hedges.

These markets, though niche, are deeply related through their focus on US fiscal stability. Their combined $119,063 in volume highlights growing trader interest in these long-tail signals. A movement in one—say, rising default odds—could amplify activity in others, like downgrade or debt ceiling markets, offering early warnings for broader economic shifts. Track these on Polymarket for real-time updates, as they provide a unique window into fiscal policy risks and opportunities in 2025.

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