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America's big wealth gap: Is it good, bad, or irrelevant?

The gap between rich and poor is at its widest since the Roaring '20s. Obama complains that it's unfair, but a growing chorus of economists and sociologists say it's worse than that.

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President Obama has pitched a "fair share" approach to the economy as a central part of his re-election campaign. In his newly released budget, the president proposes, for example, that investment dividends be taxed at the same rate as wage income for high earners.  And he argues that, down the road, one principle of tax-code reform should be that the very rich pay at least 30 percent of their income in federal taxes.  

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The US tax code is an inevitable part of any public debate over issues related to inequality and economic fairness. But economists say past tax policies, which have allowed the wealthy to keep more of their income, aren't the only reason that income gaps have widened.

Other factors that may be at play include an increasingly high-tech economy, which has put a premium on skills and education. Also, whether because of market forces or the policy climate, a rising share of national income has been going to corporations (as profits), while the portion that goes to pay workers has declined. That shift benefits owners of corporate stock.

So long as a boom time kept most people's financial fortunes on the rise, few jumped up and down over the greater concentration of wealth in fewer hands. But the hard times that ensued after the financial system's near-collapse in 2008 have changed that. It's much more top of mind now that the share of people officially deemed to be living in poverty has jumped from about 12.5 percent to 15 percent since 2007, wages are barely rising for the middle class, and many millions more people are out of work.

America has seen the income gap widen before. Often, when class differences moved to center stage, the result has been a political realignment that tilted power and policy at least modestly away from the rich and big business. The 1930s and, before that, the Progressive Era in the early 1900s are prime examples.

But for every individual who is wringing his or her hands over income inequality, there's someone who sees it as the American way.

"You'll make money according to what you've done in life," and according to your education and skills, says Paula Alibrandi, who works as an executive assistant in Boston. "That's only right."

Here's a look at the key arguments:

It's bad for the economy

Nick Hanauer isn't the person you'd expect to be vocal in the fight against inequality. He does venture capital deals as a founder of the firm Second Avenue Partners in Seattle. He's part of that top 1 percent, not one of the so-called 99 percenters involved in various "Occupy" protests in recent months.

But as he sees it, the widening of inequality has created an unhealthy economy, even for people like him.

"If you have a society where the people at the very tippy top accumulate all of the resources, you choke the economy to death," he says.

Mr. Hanauer says that investors and entrepreneurs like himself play an important role in job creation, but that the ability of the middle class to buy products is even more crucial.

"Steve Jobs didn't launch the iPhone in Bangladesh or the Congo. The iPhone is nothing without millions of people who can afford to buy it," says Hanauer, who has recently co-authored a political-economy book called "Gardens of Democracy."

Many economists, to greater or lesser extents, support Hanauer's general point: that a more balanced distribution of income would probably help economic growth.


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