Firstly, capital gains and dividends are income. They're not taxed as personal income because of how our tax law is worded, but that law is not set in stone, and the way it is right now is, shall we say, intentionally favorable to certain people.

Your better option doesn't actually work, though, because the really rich can dodge it by borrowing money against their wealth as collateral, and because once stock (and other capital) is inherited, the new owner doesn't pay taxes on its appreciation before acquiring it - so most of it is essentially untaxed entirely.