What term is used to describe a tax rate lower than that applied to ordinary income?

The term that describes a tax rate lower than that applied to ordinary income is referred to as a preferential tax rate. This term typically applies to certain types of income, such as long-term capital gains and qualified dividends, which are taxed at lower rates than ordinary income. This preferential treatment is designed to encourage investment and stimulate economic growth by making it more attractive for individuals to hold investments for longer periods, thus benefiting the economy overall.

The distinction between ordinary income and preferential tax rates is important because it can significantly affect tax planning strategies. Understanding how these rates work can help individuals maximize their tax savings by timing the sale of investments or choosing specific investment strategies that align with tax advantages.