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Can Investment Tax Credits Reduce Employment? Explain

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Many states provide firms with an investment tax credit that effectively reduces the price of capital. In theory these credits are designed to stimulate new investment and thus create jobs. Critics have argued that if there are strong factor substitution effects, these subsides can reduce employment in the state. Explain their argument.

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Solution Summary

This solution explains why critics can argue that an investment tax credit can actually reduce employment instead of increasing it.

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When speaking of factor substitution effects, critics are referring to factors of production; in this case, labor and capital. ...

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