Introduction to Finance

Eff ects of Tax Policy 
The 
tax policy
and tax program of the federal government have 
a direct eff ect on monetary and credit conditions that may work in several ways. The level 
of taxes in relation to national income may aff ect the volume of saving and, thus, the funds 
available for investment without credit expansion. The tax structure also determines whether 
saving is done largely by upper-income groups, middle-income groups, or all groups. This 
can aff ect the amount of funds available for diff erent types of investment. Persons in middle-
income groups may be more conservative than those with more wealth. They tend to favor 
bonds or mortgages over equity investments. Persons in high tax brackets, on the other hand, 
tend to invest in securities of state and local governments because income from these invest-
ments is not subject to federal income taxes. They also may invest for capital gains, since taxes 
on the gains may be deferred until the asset is sold.
Changes in corporate tax rates also may aff ect the amount of funds available for short-
term investment in government bonds and the balances kept in bank accounts. The larger the 
tax payments, the less a corporation has available for current spending. Also, if tax rates are 
raised with little warning, a corporation may be forced to use funds it had been holding for 
future use. Businesses that are short of funds may be forced to borrow to meet their taxes. In 
either case, a smaller amount of credit is available for other uses.
Recent Financial Crisis Related Activities
CRISIS
The U.S. Treasury, under the leadership of Treasury Secretary Henry Paulson, played 
an important role in helping the United States survive the 2007–08 fi nancial crisis and the sub-
sequent recession. The Treasury, sometimes working closely with the Fed, helped bring about 
the acquisition of Bear Sterns by JPMorgan Chase & Co. in March 2008. Under the leadership 
of Henry Paulson, the Treasury was actively involved in assisting fi nancial institutions on 
the brink of collapse to fi nd help through mergers with fi nancially stronger institutions. In 
September 2008, Bank of America acquired Merrill Lynch. However, during the same month, 
Lehman Brothers declared bankruptcy when no viable fi nancial alternatives surfaced. Shortly 
thereafter, American International Group (AIG) was “bailed out” by the Federal Reserve and 
Treasury eff orts, with the U.S. government receiving an ownership interest in AIG.
The 
Economic Stabilization Act of 2008
provided the Treasury with funds to purchase 
troubled or toxic assets held by fi nancial institutions. However, much of the 
Troubled Asset 
Relief Program (TARP)
funds were used to invest capital in banks with little equity on their 
balance sheets, as well as to rescue large “too big to fail” fi nancial institutions and even large 
nonfi nancial business fi rms—such as General Motors and Chrysler—that were on the verge 
of failing.