There is a lot of interesting research on wealth inequality in the US and around the world. For those interested in looking at data, I suggest the following as a starting point:
A historical database of top incomes in several countries: http://184.168.89.58/sketch/
A nice theoretical starting point on taxation and inequality: http://arxiv.org/pdf/cond-mat/0002374
Note that the term used to express trade in the first section of the paper could also be used to model progressive/negative tax rates.
Plots of the income going to the top 0.1% above a plot of the US top marginal tax rate (a proxy for the progressivity of the tax scheme):
http://visualecon.wpengine.netdna-cdn.com/wp-content/uploads...
The top 5-10% of incomes tend to follow a pareto distribution which has a very fat tail. If the share owned by the top 0.01% increases, so will the share of the top 0.1% and the top 1%. Conversely, the share of the bottom 90% will decrease. In comparison to the 1970s, the take home pay of the bottom 90% is probably 30% lower just because of these distributional effects, while the relative income of the top 0.1% has increased 5 or 6 times. The next time you see an exorbitantly high CEO salary, it might be worth wondering how it affects you. Likely, many readers here are in the top 95-99% for whom the effect is somewhat neutral.
Some argue that inequality is good for growth, and that a rising tide raises all boats, etc. But the literature regarding the correlation between GINI coefficients and long-term growth is weak and not conclusive. When I looked at the data from the income database cited above, I could see little correlation for developed and undeveloped countries. I seem to remember reading an MIT thesis to the same effect.
Perfect redistribution and equality would obviously eliminate economic incentives for growth. Near-perfect inequality, might have the same result. The very small fraction of the population in which wealth has condensed would be economically motivated, but the rest of the population that is living on the welfare state (e.g. welfare, minimum wage + EITC) would have a reduced incentive to earn more. A detailed analysis of the EITC is interesting, but peripheral to my point.
Furthermore, when inequality varies like a power law, it is easy to see that a rising tide with reduced Pareto coefficient (increased inequality) could lead to a worse outcome for the majority.
The obvious way to address inequality is through progressive or redistributive taxation. The theoretical paper linked above shows how increasing progressivity reduces inequality, but this result is also intuitive. With a 100% redistributive tax, one would have perfect equality.
Increasing income tax progressivity alters financial incentives and creates incentives for small business and corporations that target the (more affluent) majority. By contrast, flat or regressive taxes alter the economics to favour larger customers. There is a related but much more complex story for international taxation. When corporations accumulate their income in corporate tax havens and then repatriate that income during a "tax holiday", the result is a highly regressive tax system.
Many argue about addressing inequality through "job creation" and "big government projects". I don't have a story related to this, but the Canadian data I have looked at makes me a little suspicious. I guess when you inject funds at a single point in the economy (e.g. corporation) and then allow it to trickle down to employees, portions of those funds would be funnelled off at every level of the corporation and the net result may be an increase in inequality. However, if that corporation is performing a valuable social service to the public, then that may mitigate the inequality.
I guess my main point is that the story of income inequality is a complex one that is closely related to taxation. As such, it is a policy choice of the government and the people who elect them. If the "99%" feel that they are not satisfied with the deal that has been struck, then they can voice their opinion in the hope that the government will alter that deal.
