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Tax credits in the auto industry

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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' cost 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 statue. Outline the basis of the argument most likely used by union officials. (Hint: Consider the impact that the statue would have on auto manufacturers' capital-to-labor ration.) As a representative for one of the automakers, how would you counter the union officials' argument?

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Solution Summary

How investment tax credits are viewed by labor unions and automakers.

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When more high-tech equipment is used, the automakers' capital to labor ratio increases. Thus, fewer workers are needed to do the same work because each worker has more capital. Union officials would be concerned about possible layoffs as capital to labor ratios increased. Fewer union ...

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