Month: October 2009

China’s GDP May Exceed US GDP by 2017

When measured in purchasing power parity terms (PPP), China’s GDP stood at $7.9 Trillion in 2008, compared to 2008 US GDP of $14.4 Trillion. If China’s GDP growth exceeds US GDP growth by 8% for the next 8 years, then China’s GDP will exceed US GDP by 2017 [1].

China need not continue growing at a 10% clip to surpass the US – it simply needs to exceed US GDP growth by 8%, which it has done for most of the last 3 decades. If the US recovery from the Great Recession is prolonged, it’s quite possible that US GDP growth will hover between 0 and 1% for some time. In that scenario, China need only maintain 8% GDP growth over the next decade. They appear likely to accomplish this feat in both 2008 and 2009, during the heart of the recession!

In nominal (exchange-rate) terms, China’s 2008 GDP was only $4.4 Trillion, still less than a third that of the US. But that will change with a weakening dollar and an appreciating yuan, and this may be accelerated if key commodities like oil eventually begin trading in currencies other than the USD. The NextBigFuture blog takes into account the historical trend of US-Chinese exchange rates, and concludes that even in nominal terms, China’s GDP will surpass US GDP in 2017.

Don’t be surprised if eight hence, China has the world’s largest economy. After all, China and India were the world’s largest economies for most of the last few millenia [2]. The world economic order appears to be reverting to norm.

[1] The US economy was 82% larger than the Chinese economy in 2008, when measured in PPP terms. 8% growth compounded over a decade yields 85% growth (1.08^8) – which means that the Chinese economy will just barely surpass the US economy in eight years if China’s growth continues to exceed US growth by 8%. In concrete terms, assume that China grows at 10% per year over the next eight years, and that the US grows at 2% per year. In 2017, China’s GDP would be $16.9 Trillion, compared to US GDP at $16.85 Trillion.

[2] See the chart on pdf page 4 of this paper presented to the International Conference of Commercial Bank Economists:

Click to access ICCBEChinaIndia.pdf

Posted on by praveenghanta 2

Who Pays Taxes in the US?

While income taxes in the US are skewed to the rich, payroll taxes even out the tax code so that low and middle income workers contribute to government finances.

Conservatives often claim that the richest Americans pay taxes for everyone else, while liberals claim that the rich get away with special treatment at tax time. Which is true, and who really pays the government’s bills in the US?

Government Revenue By Source [1]
Source 2008 Revenue
Personal Income Tax $1,146 Billion
Payroll Tax $901 Billion
Borrowing $459 Billion
Corporate Income Tax $304 Billion
Duties, Excise, Estate, and Other Taxes $175 Billion
Total $2985 Billion

Personal income taxes are the largest single source of government revenue, but payroll taxes are close behind, followed by borrowing, corporate income taxes, and other taxes. How do tax receipts break down by income group? According to The Tax Foundation, 2007 IRS data show that the top 1% of taxpayers paid 40% of income taxes, while the top 10% of taxpayers paid 71% of income taxes. But when payroll taxes are included, the picture looks more balanced:

Government Revenue By Income Group [2]
Source 2008 Revenue
Income and Payroll Tax Paid by Top 10% $1056 Billion
Income and Payroll Tax Paid by Remaining 90% $991 Billion
Borrowing $459 Billion
Corporate Income Tax $304 Billion
Duties, Excise, Estate, and Other Taxes $175 Billion
Total $2985 Billion

The top 10% of individual taxpayers provide 35% of all government revenue, while the bottom 90% provide 33%. Borrowing and corporate taxes provide most of the remainder. When looking at this data, a few interesting facts stand out: While the rich pay far more on an individual basis than middle and lower income individuals, they hardly support the government single-handedly. The richest Americans (the top 1%) also pay an average tax rate significantly lower than the top marginal rate, so they do appear to benefit significantly from deductions and exclusions in the tax code.

[1] The 2010 US Budget Summary Tables provide a breakdown of government revenue by source. PDF page contains the revenue breakdown.

[2] The amount of income tax paid by the top 10% and bottom 90% is taken from the Tax Foundation’s summary of IRS data. For payroll taxes, the breakdown was estimated based on the fact that Social Security taxes are limited to the first $102,000 in income for 2008. Virtually all of the top 10% will be above this limit since the minimum AGI for those in the top 10% was $113,000 for 2007. One complication is estimating how many W-2 wage earners file on a single return. In 2007 there were 153 million individuals in the labor force, but only 141 million returns. We can use this ratio (roughly 1.1) to adjust our calculation. The calculations were also proportionally adjusted for the fact that the Tax Foundation and IRS data is for 2007, while the budget data used is from 2008. The 14 million households in the top 10% pay approximately $240 Billion annually in payroll taxes. The remaining 90% of the workforce pays $660 Billion in payroll taxes.

Posted on by praveenghanta 3