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How are various types of income taxed differently in the USA?
Long-term capital gains, which is often the main element of investment income for investors who are not high-frequency day traders, are taxed at a single rate that is often substantially below the marginal rate they would otherwise be taxed at, particularly for wealthy individuals. There are a few rationales behind this treatment; the two most common are that the government wants to encourage long-term investments (as opposed to short-term speculation), and that capital gains are a kind of double taxation (from one point of view) as they are coming from income that has already been taxed once before (as wage or ordinary income).  The latter in particular is highly controversial, but this is one of the more divisive political issues in the taxation front - one party would eliminate the tax entirely, the other would eliminate the difference. For most individuals, the majority of their long-term capital gains are taxed at 15% up to almost half of a million dollars total AGI, which is a fairly low rate - it's equivalent to the rate a taxpayer would pay on up to $37,000 in wage income (after deductions/exemptions/etc.).  You can see from this table in Wikipedia that it is much preferred to pay long-term capital gains rates when possible - at every point it's at least 10% lower than the tax rate for ordinary income. Ordinary income includes wages and many other sources of income - basically, anything that is not long term capital gains. Wage income is taxed at this rate, and also subject to some non-income-tax taxes (FICA and Medicare in particular); other sources of ordinary income are not subject to those taxes (including IRA income).  Short term capital gains are generally included in this bucket. Qualified Dividends are treated similarly to long-term capital gains (as they are of a similar nature), and taxed accordingly. The "Net Investment Tax" is basically applying the Medicare tax to investment income for higher-income taxpayers ($125k single, $250k joint).  It's on top of capital gains rates for them.  It came about through the Affordable Care Act, and is one of the first provisions likely to be repealed by the new Congress (as it can be repealed through the budgeting provision).  It seems likely that 2017 taxes will not contain this provision.