Calling it earnings is a bit confusing because it's not a term that the IRS uses for individual investors, and it has a specific meaning for the companies VTI holds.
So let's get some terminology down:
Dividends - This is cash money a company pays you and other individual investors as an incentive to stay as owners. VTI owns lots of companies, some pay dividends, some do not. VTI in turn gives you the dividends. In 2021 they paid $2.9303 in dividends per share.
Capital Gains - This is the difference between a company's price today and what it was when you purchased it. Using VTI in 2021 as an example, 12/31/2020 it was selling for $194.64 per share, and 12/31/2021 it was selling for $241.44 per share. If you purchased it for the 12/31/2020 price, you would have $46.80 in capital gains on 12/31/2021. If you keep the shares, the capital gains are unrealized capital gains. If you sold the shares on 12/31/2021, the capital gains are realized capital gains.
Capital Gains Distributions - This is something you most often find associate with funds. VTI hasn't paid out any Capital Gains Distributions since 2000, but some funds pay these out regularly. When a fund changes what companies it owns, it needs to sell off the old companies, and these can generate capital gains. The gains are sometimes distributed to you, and other individual investors as a cash payment.
OK, so let's get to taxes.
Dividends: Something like 95% or more of the dividends VTI pays are qualified dividends. These get taxed lower than your federal tax rate: 0%, 15% and 20%. The other 5% of the dividends are ordinary dividends and get taxed at your normal federal tax rate. So getting dividends is no worse of a tax hit than making money at your job (it's taxed the same or lower). Because not everyone wants to spend their dividends, brokerages offer to reinvest the dividends into more VTI, but you'll still owe taxes on all the dividends. Because of this, it's simpler for taxes to set your account to pay the dividends if you're looking to take money out of the account anyway.
Capital Gains: As seattlecyclone explained, you only owe taxes on the gain, so a 15% tax rate on a 7% gain is no problem. The easiest way to think about this is in a per share way. The tax rates are equal to your federal income tax rate if you've owned the shares less than a year, but they can follow the 0%, 10%, 20% long term capital gain rates if held longer. One technique is to wait until your income is low in retirement to sell your stocks. The 0% long term tax rate reaches up to $40K for a single person of $80K for married filling jointly.
Unrealized capital gains are awesome, because part of it belongs to the federal government, but you get to keep that invested until you need it. If you wait until your other sources of income are low: a lull in employment, early retirement, etc. You may not have to pay the capital gains at all.
Realized capital gains mean you sold something. It doesn't usually make sense to sell something, only to turn around and buy it again because you'd lose money to taxes. That's why you see cautions against it. It makes sense if you can lock in a real low capital gains. It makes a lot of sense to fill our your 0% capital gains tax bracket.
The taxes follow the per-share gain, not the overall gain in the account. So if you have 100 shares that have increased from $100 to $200, your account has gone from $10,000 to $20,000. If you cash in on that gain, you could sell 50 shares for $200. You'd be left with $5,000 in realized capital gains (from the shares you sold), and $5,000 in unrealized capital gains (included in the shares you didn't sell). If your tax rate is 10%, you'd pay $500 in capital gains taxes for the shares you sold. You don't have to pay anything on the the shares you keep until you sell them and your unrealized capital gains become realized capital gains.
Capital Gains Distributions: Your hand is forced on this one. It looks like Vanguard is trying their best not to liquidate stocks in way that makes capital gains distributions. I'm not actually sure what techniques they use to get rid of old companies and add new ones without generating these gains. But I believe they could be less successful in the future either due to government or market action. Your only technique here is if you know ahead of time of capital gains distributions, you could include them in your estimate of yearly gains to stay within lower brackets.
