A couple reasons. First, long-term capital gains do not have their cost basis adjusted for inflation in the US (some other countries do), which is a significant

A couple reasons. First, long-term capital gains do not have their cost basis adjusted for inflation in the US (some other countries do), which is a significant drag on real returns -- you are literally paying taxes on inflation. This does not materially affect income. Second, income does not have any downside risk, you can't lose money, whereas capital gains do and with limited ability to deduct those losses in the US. Lower tax rates offset lack of deductibility for material losses that don't affect income. If these losses became deductible, which they are in some other countries, then treating it like income would be fair. It is also worth noting that the combined long-term capital gains tax rates in the many parts of the US are already among the highest in the world. You will receive more favorable tax treatment in most of Europe than California, for example. There is a separate policy issue: governments want to incentivize long-term investment, which are inherently more risky than short-term investments, ceteris paribus. If you treat long-term capital investments like short-term income investments, it strongly incentivizes investment to flow into rent-seeking cashflow businesses -- same expected return with much less risk. You see this in many parts of Europe where an enormous percentage of available capital flows into rental property investment.