It isn't. You're disregarding corporate tax. The unearned income tax is levied on after-tax profits of the corporation that pays the dividends. Suppose yo're a

It isn't. You're disregarding corporate tax. The unearned income tax is levied on after-tax profits of the corporation that pays the dividends. Suppose yo're a dentist. You have your own little dentist company, your assistant/s is/are employees of that. Now you have to choose how to pay yourself: Pay yourself a salary (which you set in December) or take the profit? If you do the former, you'll pay regular income tax. If you do the latter, the company will pay corporate tax on the profits, pay you a dividend and then you pay unearned income tax. One of the goals of a modern tax system is that your after-tax income should be roughly the same in both cases. Motivated by fairness, by a desire that tax rules shouldn't motivate business decisions, or both.