Nov. 8--Pundits in Washington from time to time like to debate how to make the tax system more "fair." At one level, this is comical. Asking the tax system to be more fair is like asking Barack Obama not to use a teleprompter: theoretically possible, but not going to happen in the real world.

There is simply no "fair" way to steal one-third of the nation's output and give it to people who never earned it. It's theft at the barrel of a gun, just an Army-issue one.

On the other hand, there are ways to make the tax system less unfair. Our tax system punishes the very activities we most want to encourage. It's a good use of time to examine how our tax system is the most unfair, and think of free-market solutions to do something about it.

Let's start with small businesses. If an entrepreneur decides to start up a firm, he'll have to pay profit taxes at his top marginal tax rate. This seems fair enough, unless the small business owner is (say) a wife starting a side venture. If her husband's income puts them in the 25 percent bracket, that's the income-tax rate of dollar one of her profits. She doesn't get to benefit at all from a graduated-rate structure, and a firm with very low profits may find itself with very high start-up tax rates.

Even worse, she will have to pay the 15.3 percent self-employment tax on the first $105,000 or so of profits (2.9 percent after that). Add in state income taxes, and our budding entrepreneur faces a profit tax approaching 50 percent -- and all this from a middle-class family. In the more high-earning households that reside in high-tax states, the initial profit tax can easily hit 60 percent, which would make even the French and German tax collectors blush.

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Small business start-ups face some of the highest marginal tax rates of any taxpayer. Considering small businesses create somewhere between one-third and one-half of the jobs in America, this is crazy. The simplest way to correct this inequity is to simply repeal the self-employment tax, or at least the biggest part for Social Security (12.4 percent).

What about investing? Surely savings and deferring consumption is something we want to encourage. With the imminent implosion of Social Security and Medicare, one would think our government would be doing everything possible to encourage savings. This is to say nothing of the oft-repeated analysis that America needs to become a nation of savers again if we are to avoid any further credit crises.