Which is more important: income equality or growth?

To see the limits of this reasoning, consider two hypothetical scenarios. In the first, 99 percent of the population has an average income of $10 and the top 1 percent has an income of $100. In the second, we increase the income gap. Now, the 99 percent earn $12 and the top 1 percent earns $130. Which scenario is better?

This hypothetical comparison captures several key points. First, everyone is better off with the second distribution of wealth than with the first--a clear Pareto improvement. Second, the gap between the rich and the poor in the second distribution is greater in both absolute and relative terms.

The stark challenge to ardent egalitarians is explaining why anyone should prefer the first distribution to the second.

An underlying question, however, is whether or not the top 1 percent is extracting wealth from the other 99 percent, either through taxation, regulation or force. Absent some form of unfair dealing, everyone should prefer the second scenario even though there is more income inequality.

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