The 2025 tax law reduced projected federal revenue by about $4.9 trillion between 2026 and 2035, according to an analysis circulating on Zhihu. More than 80% of that loss comes from extending expiring tax cuts, with business investment incentives also trimming corporate tax receipts. The shortfall sets the stakes for US tax and fiscal policy after the midterm elections, as Washington tries to boost growth with tax cuts while carrying a growing interest bill on the national debt.
Extending tax cuts deepens the revenue gap
The $4.9 trillion is not a one-time outlay. It lowers the entire budget baseline for the next decade. Most of the loss comes from tax cuts that carry expiration dates: if Congress lets them lapse, household and business taxes rise; if it extends them, projected revenue falls. Business investment incentives cut corporate tax revenue further, narrowing fiscal room. Policymakers face a trade-off: tax cuts may support near-term growth, but the revenue gap must be filled elsewhere or turned into a larger deficit.
Three fiscal paths are possible
One path is expansion: keep cutting taxes and raise spending, accepting a larger deficit. A second is austerity: trim benefits and control spending, which could ease deficit pressure but faces political resistance. A third is a mix: keep tax cuts, cut some spending, with the outcome depending on the scale of each. Under any path, the size of the national debt and interest costs are issues Congress cannot avoid. The debt limit is set at $41.1 trillion for 2026, and another debt-ceiling fight is likely within about a year.
Markets feel fiscal policy through several channels
Fiscal expansion may help US corporate earnings but can weigh on Treasuries as deficits and issuance rise. Austerity may ease pressure on Treasuries but could drag on growth. The dollar and gold depend on the relative strength of rates, capital flows and debt concerns; bitcoin is more sensitive to liquidity expectations. One point is easily missed: a larger deficit does not automatically mean the Federal Reserve will cut rates soon. The Fed and the Treasury are separate policy systems. If fiscal stimulus raises inflation pressure, the Fed could even keep rates higher, which would clearly affect the Nasdaq, gold, bitcoin and long-dated Treasuries.
Dates to watch
The November 2026 midterms will decide control of Congress. A new Congress convenes in early 2027, when tax and budget legislation enters a substantive phase. The debt limit could resurface in 2027. The fiscal 2028 budget talks will cover defense, Medicare and welfare spending. Before the 2028 presidential election, watch whether a new round of tax cuts and fiscal stimulus is proposed. More important than which party controls Congress are three questions: will the US keep using tax cuts to stimulate the economy, will it actually start controlling the deficit, and will it raise more revenue through tariffs? Higher tariff revenue does not mean the fiscal problem is solved, because reduced imports, business costs and consumers also matter.
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