Suppose one guy makes nothing in his first year because he is building a business and then the hard work pays off and in year 2 he makes $200,000. The second guy isn't much of a risk taker and he makes $100,000 both years. The entrepreneur will have his 200K taxed at a higher rate. Talk about unfair!

Guy A, the entrepreneur, only pays more in taxes if Guy B is not self-employed, and even then there is a "but".

Guy A makes $200K in his second year. He is self-employed. Unless he cleverly uses Sub S rules, and using $200K as taxable income(and 2006 tax rates), he will owe 52591.50 in federal taxes, 5800 in medicare, and 11780 in social security(using 95K income cap), for a total of $70,171.50.

Guy B, also self-employed but risk-averse, makes 100k two years running. Using 2006 rates for convenience, his yearly totals are 22331.5, 2900, and 11780. Double those for the two years, and the total is $74,022.

If Guy B is not self-employed, hence "not taking a risk", his total is reduced by $14,680 by the fiction that the cost goes to his employer not him. In that case, Guy A pays about 10K more than B, obout 17%.

This was a quick stab, so I am likely wrong somewhere.

Nonetheless, this does not really diminish the fact that Guy A's risk is not amply rewarded. And, it points out the pernicious effect of the base 15.3% tax rate on the self-employed.