Too much inequality means too few participants in the economic decision making process which leads to instability (i.e. the mad king phenomenon). We are getting closer to the point of instability now, as we reach higher levels of inequality.
That only makes sense if you think that people are only ever motivated by money.
That kind of "ambition" is greed. There are other forms of currency that are arguably much more desired to a healthy society and don't go away in a more equal society: reputation, respect, intellectual authority, etc.
Those doesn't scale though, most jobs doesn't award you any of those. Money is the only real reward low status jobs has gotten ever, take that away and why would anyone wanna work low status jobs?
No, but if we build a society where inequality ceases to be an issue, jobs will stop rewarding greed and start rewarding whatever other currencies attract the best talent.
Similarly, entrepreneurship will be based on those currencies.
Money is a human construct. Inequality is a human construct. Neither are a requirement for the existence of humanity or for humans to thrive.
Looking back through history, there's always jerks who ruin this, being equal isn't enough: either they want to have more money than, and power over, everyone else; or they explicitly want others to suffer, usually people who look different.
Dealing with those personalities has cost us trillions of dollars throughout human history, but it keeps happening, because you can't evolve better brains in the few thousand years humans have been civilized.
In order for there to be "too little inequality" to the extent that you describe, it would have to be impossible for anyone to, say, earn more than about $100k/yr (based on current median incomes in the US). So far as I know, no one with an iota of credibility has proposed anything remotely like this.
As it stands, any time any level of increase in taxes on the ultra-wealthy is proposed, people come out of the woodwork claiming that a higher tax rate on those making $100m, $500m, $1b/yr would just destroy all interest in striving and doing well, which is so clearly absurd.
...And, unfortunately, we also know that there are a fair number of people for whom reduced inequality would destroy their ambition, because their ambition has nothing to do with being reasonably wealthy themselves or having financial security: the reward, for them, is very explicitly being able to treat other people like they aren't even human. And that's not something society should ever accept, from anyone.