As Chris Edwards and I explain in Global Tax Revolution, nations are competing with each other to lower top tax rates thanks to the liberalizing impact of tax competition. This is confirmed by a new study from KPMG, which finds that the average top personal rate is now less than 29 percent in a survey of 87 jurisdictions. Unfortunately, the United States has a top rate of 35 percent, so we are falling behind.

To make matters worse, President-elect Barack Obama wants to move in the wrong direction. He has proposed a top tax rate of nearly 40 percent, but he wants to compound the damage by also imposing Social Security payroll taxes on income above $250,000 – thus dramatically increasing disincentives for productive behavior. As KPMG notes, this means the U.S. is moving in the wrong direction while the rest of the world moves in the right direction:

The picture that emerges is of a slow global decline in top rate personal income taxes, from an average of 31.3 percent in 2003 to 28.8 percent in 2008. …The highest personal income taxes are paid by citizens of the European Union. But it is here that we have seen the steepest falls in average tax rates, from 41.5 percent in 2003 to 36.4 percent in 2008.

…Perhaps the most significant new development in this period has been the introduction of flat rate taxes into Europe, often introduced at a much lower level than the highest variable personal rate. So far, it has been mainly Eastern European states that have taken this step, notably Estonia, where rates have fallen from 26 percent in 2003 to 21 percent in 2008, Slovakia has gone from 38 percent to 19 percent, Lithuania, which in 2007 fell 6 points to 27 percent and this year a further 3 points to 24 percent, and Romania where rates have gone from 40 percent to 16 percent.

…Overall, it appears from our survey that taxes on personal incomes are in slow decline in many countries around the world. We see the same trend in corporate income tax rates as well.