Impact of Trump’s 2025 Tax Cut Bill on U.S. Sovereign Debt and Asset Classes

1. U.S. Sovereign Debt: Current State and Projections

Current Debt Landscape

• Debt Levels: As of May 2025, U.S. national debt stands at $36 trillion, equivalent to over 120% of GDP, a significant increase from historical norms. Interest payments on the debt reached $881 billion in the last fiscal year, surpassing spending on national defense or Medicare.
• Deficit Trends: The U.S. budget deficit was approximately 6% of GDP last year, with October 2024 alone recording a $258 billion deficit. Projections indicate persistent deficits due to rising entitlement spending and stagnant revenue growth under current policies.
• Credit Rating Concerns: Moody’s downgraded the U.S. credit rating from AAA in May 2025, citing unsustainable debt and interest payment growth compared to other highly rated sovereigns. This follows earlier downgrades by Standard & Poor’s (2011) and Fitch (2023).

Impact of the Proposed Tax Cut Bill

• Revenue Reduction: The Tax Foundation estimates that extending the 2017 TCJA and implementing new tax cuts would reduce federal tax revenue by $4.1 trillion to $4.5 trillion from 2025 to 2034 on a conventional basis. Even accounting for a 1.1% increase in long-run GDP, revenue losses would only be offset by $710 billion (16%).
• Debt Ceiling Increase: The House-passed budget resolution allows a $4.5 trillion deficit increase over the next decade, contingent on $1.7 trillion in spending cuts. The Senate resolution permits a $5 trillion debt limit increase but does not allow tax cuts without corresponding fiscal adjustments.
• Fiscal Implications: The Congressional Budget Office (CBO) estimates the bill will add $3.8 trillion to the debt over the next decade. Without significant spending cuts, the debt-to-GDP ratio could rise further, potentially exceeding 130% by 2034.
• Historical Context: The Center for American Progress notes that tax cuts since 2001, including those under Bush and Trump, account for 57% of the debt ratio increase, or over 90% when excluding one-time crisis responses (e.g., COVID-19, Great Recession).

To illustrate the debt ballooning issue, the following chart projects the U.S. debt-to-GDP ratio under two scenarios: (1) current law baseline and (2) with the proposed tax cuts fully implemented.

2. Market Reactions and Concerns

• Bond Market: The bond market has reacted strongly to the proposed bill. A weak $16 billion 20-year Treasury bond auction in May 2025 saw yields spike, with 10-year Treasury yields reaching 4.61% and 30-year yields hitting 5.14%, the highest since October 2023. Investors are demanding higher yields to compensate for perceived risks, increasing borrowing costs.
• Investor Sentiment: The Moody’s downgrade and rising yields have fueled a “Sell America” trade, with foreign investors showing reluctance to hold U.S. assets due to fiscal concerns. This has weakened demand for Treasuries, further pushing up yields.
• Policy Uncertainty: Investors are wary of Trump’s tariff policies and the lack of sufficient spending cuts to offset tax reductions. The administration’s focus on tariffs and the Department of Government Efficiency (DOGE) has not fully alleviated concerns about fiscal sustainability.

3. Impact on Asset Classes if the Bill Passes the Senate

U.S. Dollar 

The U.S. dollar has already weakened against major currencies such as the euro and Japanese yen, as markets brace for the potential passage of the upcoming tax bill. If the bill is approved in both the House and Senate, the dollar could face further depreciation pressure, driven by concerns over rising deficits and national debt.

A significant increase in fiscal spending without offsetting revenue measures may erode investor confidence in the dollar, potentially leading foreign investors to scale back their exposure to U.S. assets. This shift in sentiment could place additional strain on the greenback and dampen its strength across global markets.

Gold

Gold prices surged by approximately 5% last week, as heightened market uncertainty surrounding former President Trump’s proposed tax bill dominated global financial headlines. As a traditional safe-haven asset, gold tends to benefit from periods of economic and fiscal instability, with investor demand rising in response to potential policy shifts.

Should the bill pass through both chambers of Congress, the metal could see further upside, driven by concerns over ballooning U.S. debt levels and anticipated weakness in the U.S. dollar. In the medium term, gold is projected to target the $3,500–$4,000 range, supported by a flight to safety and a possible reallocation of capital away from dollar-denominated assets.

Overall, the combination of fiscal risk, policy uncertainty, and currency pressure may provide a strong tailwind for gold in the coming months.

Wall Street

Wall Street sentiment remains mixed, with the market experiencing a minor correction in the recent session, following a weak U.S. Treasury auction and renewed concerns over the ballooning U.S. sovereign debt. Investors are increasingly cautious about the government’s long-term fiscal credibility and its ability to meet debt obligations.

However, optimism surrounding potential U.S. tax cuts has provided a short-term boost to equities, as such measures are typically viewed as equity-positive, enhancing corporate earnings and consumer spending. This has helped buoy Wall Street in the face of broader macroeconomic concerns.

While the near-term outlook appears constructive due to tax-related optimism, the longer-term trajectory for equities may be clouded by persistent financial market uncertainties, including fiscal imbalances and potential shifts in investor sentiment.

4. Conclusion

The proposed Trump tax cut bill, if passed by the Senate, is likely to significantly increase U.S. sovereign debt, pushing the debt-to-GDP ratio to unsustainable levels. This could weaken the U.S. dollar, drive demand for safe-haven assets like gold, and create mixed outcomes for equities, with short-term gains overshadowed by long-term risks from higher yields and trade disruptions. The bond market’s reaction, evidenced by rising Treasury yields and weak auction demand, underscores investor concerns about fiscal sustainability. Policymakers and investors must navigate these challenges carefully, balancing growth-oriented policies with fiscal discipline to mitigate adverse impacts on financial markets and the broader economy.