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Edward Prescott on the substitution effect

October 12, 2004
While Edward Prescott was rewarded with the Nobel prize in Economics for his work on business cycles and monetary policy, he has also done some work on the issue of the effect on the effect of taxes in discouraging work efforts. And he concludes that virtually the entire difference between the United States and Western Europe in work efforts (both in lower employment/population ratio and lower average work week for the employed) can be attributed to the higher marginal tax rates in Western Europe. Which is highly consistent with the conclusion I made in my article on the subject, that the weakness of Western European economies is largely due to high taxes.

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