Yesterday, Republican presidential candidate Donald Trump released his plan for changing the tax code. The basic story is that he would give big tax cuts across the board, with the largest tax cuts going to the wealthy. He assured everyone that it will be revenue neutral since it would lead to a huge spurt of economic growth. (His number was 6.0 percent, topping Jeb Bush's 4.0 percent by two full percentage points.)

Many of the reports on the plan did note the growth assumption and pointed out that few, if any, economists took it seriously. As a practical matter, we have seen this one before. Ronald Reagan put in place a large tax cut in the 1980s and George W. Bush did the same in the last decade. You have to try very hard to find a positive growth effect from either. Certainly no one could make the case with a straight face that these sorts of proposals could even get us to Bush's 4.0 percent number, much less Trump's 6.0 percent.

But apart from what the tax cuts may or may not be able to do in terms of growth, there is also the matter of how the Federal Reserve Board would react. If that sounds strange to you then you should be very angry at the reporters at your favorite news outlet, because they should have been talking about this.

Suppose that Donald Trump's tax cut really is the magic elixir that would get the economy to 6.0 percent annual growth. But what if the people at the Fed's Open Market Committee (FOMC) don't recognize this fact? Suppose the FOMC thinks the economy is still bound by the pre-Trump tax cut rules and believes that inflation will start to accelerate out of control if the unemployment rate falls much below its current 5.1 percent level.

In this case, we would expect to see the Fed raise interest rates sharply as they saw the Trump tax cuts boosting growth. Higher interest rates would slow house buying and new construction, discourage car sales, and put a crimp in both public and private investment. If the Fed raises interest rates high enough, it could fully offset the boost that Trump's tax cut is giving to the economy. In this case, even though the Trump tax cuts might have been the best thing for the economy since the Internet (okay, better than the Internet), we wouldn't see any dividend because the Fed would not allow it.

For this reason, the Fed's likely response to a tax cut is a fundamental question that reporters should be asking. If the Fed is likely to simply slam on the brakes to offset any possible stimulus, then a tax plan will have little prospect of providing a growth dividend.

Since the press have been obsessing (rightly) over the possibility that the Fed is about to embark on a series of rate hikes, it would be reasonable to believe that someone would think to bring together the Fed's interest rate policy and the candidate's economic plans. Thus far it seems no reporters have discovered the connection.  


Note: Typo corrected.