(Ignoring state incomes tax of course. Since I live in Texas, I’m lucky enough to do that).
Capital gains are income and reported on Form 1040. What they are not is "ordinary income" subject to the income tax table. A person with $700k on capital gains is well inside the top 1% of income.
The complaint at issue is that a passive investor who happened to have 10 million dollars that they inherited at 30, sticks it in betterment for 50 years while drawing a top 1% of income 380k for expenses ( accounting for tax rate ) will eventually have 130 million dollars. They can easily pass this amount down to children at estate tax rates to enable the next generation to do nothing as well, or they could use any one of a number of tax sheltering methods to avoid or defray the estate tax as well.
Generational wealth, or "idle wealth" has been a concern in the US from Thomas Jefferson onward - capital gains taxes are merely one mechanism to restrict it.
I'm not wading into that debate. I'm just concerned with accurate use of terminology, as multiple people in this discussion seem to be playing fast-and-loose with it.
For example, if you have a $10M net-worth, according to Gabriel Zucman & Thomas Piketty, you get higher returns on average than the little guy. Not sure the exact number, but let's say an ~8% return on average (believe it's higher).
You would make ~$800K a year in "capital gains" and pay $133K in federal taxes. If you earned $500k in income, you'd pay ~$164K in federal taxes. You'd pay another ~$35k+ in states most people live in for about a 39.8% tax rate. Not to mention, your employer is paying another 5% in payroll taxes to employ you. So, really, it's a 44.8% tax.
But if your income comes from "capital gains" instead of working, you'd pay less than half that percentage in tax -- at 16.25%.
Why is there a distinction between "capital gains" and dividends and fixed income? Because only the very wealthy get most of their income from capital gains.
Even people with $1-5M in wealth... they're mostly the people that worked really hard and still got a little lucky with their investments. They're almost all old. They've paid off their house. So... 1) most of their wealth is tied up in their house, and 2) most of what's left over is tied up in fixed income like bonds -- which are taxed as "income" and not "capital gains".