Question

In an effort to stop the migration of many of the automobile manufacturing facilities from the Detroit area, Detroit’s city council is considering passing a statute that would give investment tax credits to auto manufacturers. Effectively, this would reduce auto manufacturers’ costs of using capital and high-tech equipment in their production processes. On the evening of the vote, local union officials voiced serious objections to this statute. Outline the basis of the argument most likely used by union officials. (Hint: Consider the impact that the statute would have on auto manufacturers’ capital-to-labor ratio.) As a representative for one of the automakers, how would you counter the union officials’ argument?

Short answer

For the representative for one of the automakers, it is preferable to precede with the investment tax credits.

Step-by-step solution

Introduction

A tax incentive that allows a company to deduct a set proportion of a specified investment is an investment tax credit. The tax credit will be applied to the company's taxes.

Explain the counter the union official’s argument

The purpose of investment tax credits is to help businesses grow. This application reduces capital expenditure than labor. As a result, the iso-cost line shapes steeper than earlier, implying more capital usage than labor. This means that businesses will need to invest more money, which can help unemployed individuals to find work because businesses prefer to hire more workers as they grow.

Suppose the plan for investment tax credits is rejected. In that case, vehicle manufacturers will find a method to support their operations by migrating to locations with lower labor costs, resulting in a high unemployment rate. As a result, it is preferable to precede with the investment tax credits.