Is interest on investments treated the same as wages when it comes to personal income taxes?

I'm curious as to how income from interest earned on investments is taxed. Is the following situation correct, or am I wrong? Abe works hard and makes 40k a year. He is also a smart investor, and earns 5k from his investments. On his income taxes, he declares 45k taxable income and files his forms. Ben is a slacker, working part-time at an arcade and making just 5k a year. He can afford to do this because long ago he invested his inheritance and makes 40k a year in interest. On his income taxes, he declares 45k taxable income and files his forms. All other things being equal, do both men pay the same income taxes? Thanks the the extended eplanations about dividends and such, but for the sake of simplicity I'm assuming both men have all their investments "invested" in a simple high-interest savings account. Sorry, I know it was probably vague being worded the the way I had it.

Public Comments

1. I believe taxable interest is called "capital gains" and is taxed at a different rate than income.
2. Interest income is taxed as ordinary income at your regular tax rate. Dividend income is taxed at a maximum of 15%.
3. They'll pay the same income tax (assuming that the investement income is treated as interest or ordinary dividends) but Ben will pay less total tax as there is no FICA tax levied on unearned income. Note to MsMojoR...: Only "QUALIFIED" dividends are taxed at the lower LTCG rate. Ordinary dividends, the most common type by far, are taxed as ordinary income.
4. That depends on definitions. For interest the previous answer is correct. For dividends, it is also correct, but dividends are paid out of corporate profits. Ben owns part of a corporation in order to get dividends. The corporation pays income tax on those profits, gives Ben personally some of what is left as dividends, and Ben pays taxes again on that. The net effect is a higher rate of tax on corporate profit than on wages. Also, the corporate rate is already higher than the individual rate, in general. I think Ben is probably paying more income tax, just not personally. There are lots of arguments both ways about "fairness"; I don't think you can look at just one individual case, if that was the point of your question.
5. Yes, taxable interest income is treated as ordinary income. There are some categories of tax-exempt interest investments, however.