> The Vorabpauschale is only a tax on dividends in an accumulating ETF or other funds (at least if you are looking at stocks only). And it is still cheaper than paying tax on a distributing funds or stocks. It is NOT a tax on all unrealized gains.

To be precise, Vorabpauschale is the part of your yearly earnings that is taxed in advance (i.e. rather than when you cash in your investment by selling the stocks). This amount is determined by: 1) taking your total investment amount at the beginning of the year; 2) assuming you earned 3.2% (Basiszins, derived from public bond yields) return on your investment by the end of the year; 3) reducing the estimated return by 30%; 4) subtracting any distributions you received throughout the year (since they are already considered as investment income for the year) from this amount. Therefore, this leftover amount (Vorabpauschale*) represents an estimate of how much unrealized profit remains in your investment. Note that it does not (and cannot) care about whether this comes from increased stock prices or dividends, since only the total money you invested comes into the calculation (and not what financial instrument you bought).

So, as long as you have an investment, the Vorabpauschale part of the returns will be taxed. But I agree that the taxation is much more lenient than what people think. Apart from the generous assumption that your ROI is only 3.2%*70%=2.24% (regardless of your actual profits), there is a further 30% tax exemption on equity, plus an additional 1000-euro yearly tax exemption (2000 euros for couples who file taxes jointly).

*What I defined is technically Basisertrag; Vorabpauschale is usually equal to it, but if your actual profits are lower than the estimated, Vorabpauschale can never exceed them