As the adage goes, “The only certainties in life are death and taxes.” Yet, with President Donald Trump advocating for further corporate tax reductions, traders on platforms like Kalshi are wagering that at least one of these might be negotiable.
The federal corporate tax rate currently stands at 21%, a level established by the Tax Cuts and Jobs Act of 2017. The Kalshi market in question will resolve to “Yes” if this rate is reduced below 21% before January 1, 2026. With 35% of the chances on this bet, the tax cut is, to say the least, on the table.
Odds of corporate tax cuts?
Recent economic data presents a mixed backdrop for potential tax policy changes. The Federal Reserve has adjusted its projections, now forecasting real GDP growth at 1.7% for 2025, down from an earlier estimate of 2.1%. Concurrently, inflation expectations have risen to 2.7%, influenced in part by ongoing trade tariffs. These revisions have sparked concerns about stagflation — a scenario characterized by stagnant growth coupled with rising inflation.
The labor market remains relatively stable, with the unemployment rate holding at 4.1%. Layoff rates are lower than pre-pandemic levels, suggesting resilience even as hiring slows due to political uncertainties.
The standard theory that reducing corporate taxes can stimulate investment is accepted by numerous economists across the ideological spectrum, though there is strong disagreement about the magnitude of these effects. For example, 2008 Nobel Laureate Paul Krugman, who opposes corporate tax cuts, acknowledges, “To be fair, there’s probably something to this theory — something, but not very much.”
Conversely, other economists have more optimistic views. Numerous statistical studies have found that investment decisions are responsive to the after-tax profitability of investment, suggesting that corporate tax cuts can provide significant economic gains. Even so, the gains may not be as large as some supporters have claimed.
Betting on tax cuts
The case for:
- President Trump has reiterated his commitment to reducing taxes for businesses, emphasizing collaboration with Congress to achieve significant tax cuts.
- The House of Representatives has advanced budget resolutions supporting the administration’s tax-cut agenda, indicating a concerted effort within the Republican Party to enact further reductions.
The case against:
- Analyses suggest that extending and expanding tax cuts could substantially increase the federal deficit, with estimates ranging from $5 trillion to $11 trillion over a decade if not offset by spending cuts.
- The prospect of stagflation and other economic uncertainties may prompt caution among policymakers considering further tax reductions.
As legislative deliberations continue, traders and policymakers alike are closely monitoring economic indicators and political developments that could influence the likelihood of corporate tax rate adjustments in the near future.
