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# Between 1977 and 1989, the percentage of income paid to

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B)

If your income grows, then you pay more taxes even if the tax rate is reduced
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Re: CR - Tax - Kaplan online test [#permalink]  27 Feb 2005, 06:26
Only B explains why decreased rate increased the tax revenues.

B)Between 1977 and 1989, the before-tax income of the richest 1% of Americans increased by over 75% when adjusted for inflation
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(C). If the returns of the investments are not taxble, then it explains the drop in income tax paid, even though the 1% could be paying a lot of other taxes (property tax, road tax etc)
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(B)

(D) explains only one side of the paradox (if middle class is paying less taxes, then the richest will pay a higher percentage of overall taxes), but it doesn't say anything about the richest earning more revenue.
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Kaplan CR [#permalink]  29 Jan 2010, 11:42
Between 1977 and 1989, the percentage of income paid to Federal taxes by the richest one percent of Americans decreased, from 40 percent to 25 percent. By the end of that same period, however, the richest one percent of Americans were paying a larger proportion of all Federal tax revenues, from 12.7 percent in 1977 to 16.2 percent in 1989.

Which of the following, if true, contributes most to an explanation of the discrepancy described above?

A.Between 1977 and 1989, the Internal Revenue Service increased the percentage of its staff members responsible for audits and tax collection.
B.Between 1977 and 1989, the before-tax income of the richest one percent of Americans increased by over 75 percent when adjusted for inflation.
C.Between 1977 and 1989, many of the richest one percent of Americans shifted their investments from untaxable to taxable assets.
D.Between 1977 and 1989, the top tax rate was reduced from 70 percent to 31 percent and several tax loopholes were eliminated.
E.Between 1977 and 1989, the amount of Federal taxes paid by the richest one percent of Americans increased by $45 billion, while the amount paid by all Americans rose by$50 billion.
[Reveal] Spoiler:
B

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Last edited by mojorising800 on 29 Jan 2010, 12:53, edited 1 time in total.
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Re: Kaplan CR [#permalink]  29 Jan 2010, 12:00
Between 1977 and 1989, the percentage of income paid to Federal taxes by the richest one percent of Americans decreased, from 40 percent to 25 percent. By the end of that same period, however, the richest one percent of Americans were paying a larger proportion of all Federal tax revenues, from 12.7 percent in 1977 to 16.2 percent in 1989.

Which of the following, if true, contributes most to an explanation of the discrepancy described above?

A.Between 1977 and 1989, the Internal Revenue Service increased the percentage of its staff members responsible for audits and tax collection.
B.Between 1977 and 1989, the before-tax income of the richest one percent of Americans increased by over 75 percent when adjusted for inflation.
C.Between 1977 and 1989, many of the richest one percent of Americans shifted their investments from untaxable to taxable assets.
D.Between 1977 and 1989, the top tax rate was reduced from 70 percent to 31 percent and several tax loopholes were eliminated.
E.Between 1977 and 1989, the amount of Federal taxes paid by the richest one percent of Americans increased by $45 billion, while the amount paid by all Americans rose by$50 billion

Explanation:
The stems says - 1977 the tax for the richest people was 40% and in 1989 the tax for the richest people was 25%.
Even then the in 1977 the total tax paid by richest people was 12.7 % but in 1989 the total tax paid by the richest people was 16.2%

For easy analysis, lets say the total taxable asset of one rich guy in 1977 was 100 million dollars. Tax paid = 40 million dollars (40% 0f 100m)
Now in 1989, the same person shifted his non taxable assets to taxable asset, lets now becomes total asset as 200 million dollars. Hence the Tax paid in 1989 = 50 million dollars (25% of 200m).
Therefore even if the tax rate was reduced, the tax actually paid by the rich guy was more and this can be an increase in % of the total tax collected among rich people.
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Re: Kaplan CR [#permalink]  29 Jan 2010, 12:29
Between 1977 and 1989, the percentage of income paid to Federal taxes by the richest one percent of Americans decreased, from 40 percent to 25 percent. By the end of that same period, however, the richest one percent of Americans were paying a larger proportion of all Federal tax revenues, from 12.7 percent in 1977 to 16.2 percent in 1989.

Which of the following, if true, contributes most to an explanation of the discrepancy described above?

A.Between 1977 and 1989, the Internal Revenue Service increased the percentage of its staff members responsible for audits and tax collection. - makes no sense. the q/stem does not talk anything about staff increases. here the impact is thru rich pple.
B.Between 1977 and 1989, the before-tax income of the richest one percent of Americans increased by over 75 percent when adjusted for inflation - ditto, nothing talks about inflation. and why will inflation cause more federal tax revenues.
C.Between 1977 and 1989, many of the richest one percent of Americans shifted their investments from untaxable to taxable assets. - do the math, initial amount when they were taxed. later because of moving from taxable to untaxable assets more taxes. also look for key words
D.Between 1977 and 1989, the top tax rate was reduced from 70 percent to 31 percent and several tax loopholes were eliminated - does not make sense.
E.Between 1977 and 1989, the amount of Federal taxes paid by the richest one percent of Americans increased by $45 billion, while the amount paid by all Americans rose by$50 billion - this increase will not lower federal tax to d ecrease and federal tax revenue to increase
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Re: Kaplan CR [#permalink]  30 Jan 2010, 04:36
why not B?

the same logic applies to B.

if instead of 100million the income rose to 175million. would the logic not be applicable?
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Re: Kaplan CR [#permalink]  30 Jan 2010, 07:35
yeah - "B" has a more straight explanation as to why one pays more taxes - due to inflation.

C = nothing talks about transferring assets from one to the other.
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Re: Kaplan CR [#permalink]  30 Jan 2010, 21:23
Expert's post
On this explain question, we know two facts--tax rates of the top one percent plummeted, but the amount of taxes they paid relevant to the rest of us skyrocketed. This leads us to only one conclusion: the top one percent is earning more money to be taxed! (B) matches perfectly.

Note that the "adjusted for inflation" is a phrase that is almost guaranteed to show up at least once on the GMAT. It's a sure thing that the wealthy earned more dollars in 1989 than in 1977. Inflation during that period means that each dollar was individually worth less; the same value of pay or income would be measured in a larger number of dollars! However, that change in number affected all income brackets in that time period, so would have no effect on the proportion that the wealthy paid. By adjusting for inflation, we are told that the rich's amount of wealth--not merely their number of dollars--had increased.

(C) is a tempting trap because it seems to provide a possible explanation for the discrepancy. However, being told that "many" of the wealthy had tax-free "investments" doesn't give us much to go on. Without the proportion of the wealthy that make up "many," or a proportion of their income put into "investments," we have zero clue how much money is actually being newly taxed.
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Prepare with Kaplan and save $150 on a course! Kaplan Reviews Intern Joined: 08 Nov 2006 Posts: 3 Followers: 0 Kudos [?]: 1 [0], given: 0 Re: Kaplan CR [#permalink] 17 Feb 2010, 10:29 I think it should be C. The first tax was income tax while the second one was tax revenue. The richest one percent would definitely have increased their other taxable assets and since the income tax revenue reduced it obviously should mean that they have increased their other taxable assets like wealth,gift... Retired Moderator Joined: 02 Sep 2010 Posts: 805 Location: London Followers: 89 Kudos [?]: 682 [0], given: 25 Re: Kaplan CR [#permalink] 07 Sep 2010, 04:11 KapTeacherEli wrote: On this explain question, we know two facts--tax rates of the top one percent plummeted, but the amount of taxes they paid relevant to the rest of us skyrocketed. This leads us to only one conclusion: the top one percent is earning more money to be taxed! (B) matches perfectly. Note that the "adjusted for inflation" is a phrase that is almost guaranteed to show up at least once on the GMAT. It's a sure thing that the wealthy earned more dollars in 1989 than in 1977. Inflation during that period means that each dollar was individually worth less; the same value of pay or income would be measured in a larger number of dollars! However, that change in number affected all income brackets in that time period, so would have no effect on the proportion that the wealthy paid. By adjusting for inflation, we are told that the rich's amount of wealth--not merely their number of dollars--had increased. (C) is a tempting trap because it seems to provide a possible explanation for the discrepancy. However, being told that "many" of the wealthy had tax-free "investments" doesn't give us much to go on. Without the proportion of the wealthy that make up "many," or a proportion of their income put into "investments," we have zero clue how much money is actually being newly taxed. I just got this question in one of the online CATs. I still cant quite get my head around how (b) is better than (c). The bit I dont understand is how (b) explains that the percentage of income the wealthy paid off as tax went down from 40% to 25% _________________ Kaplan GMAT Instructor Joined: 25 Aug 2009 Posts: 644 Location: Cambridge, MA Followers: 77 Kudos [?]: 221 [0], given: 2 Re: Kaplan CR [#permalink] 07 Sep 2010, 11:26 Expert's post shrouded1 wrote: I just got this question in one of the online CATs. I still cant quite get my head around how (b) is better than (c). The bit I dont understand is how (b) explains that the percentage of income the wealthy paid off as tax went down from 40% to 25% How would an explanation of this fact contribute to our understanding of the mystery? It could that the rich paid less taxes due to a change in laws, a change in banking strategies, a change in nationality. But none of these would explain how they were paying a larger portion of the nation's taxes, despite paying a smaller portion of their own income. B, however, makes the change clear. For whatever reason--we don't know, or need to know--the wealthy are paying a smaller portion of a larger amount of money. This explains how they can be paying less in relation to themselves, but more in relation to others, and so is the correct answer. Hope this helps! _________________ Eli Meyer Kaplan Teacher http://www.kaptest.com/GMAT Prepare with Kaplan and save$150 on a course!

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Re: Kaplan CR [#permalink]  07 Sep 2010, 13:39
C even makes it more confusing and controversial. If 1% percent richest shifted their income from nontaxable assets to taxable ones, well, then they should pay a higher percentage of their income to the feds, not the lower.
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Re: Kaplan CR [#permalink]  07 Sep 2010, 16:32
Thanks guy
Makes more sense to me now

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Re: Kaplan CR [#permalink]  08 Sep 2010, 05:27
KapTeacherEli wrote:
shrouded1 wrote:
I just got this question in one of the online CATs. I still cant quite get my head around how (b) is better than (c). The bit I dont understand is how (b) explains that the percentage of income the wealthy paid off as tax went down from 40% to 25%
How would an explanation of this fact contribute to our understanding of the mystery?

It could that the rich paid less taxes due to a change in laws, a change in banking strategies, a change in nationality. But none of these would explain how they were paying a larger portion of the nation's taxes, despite paying a smaller portion of their own income.

B, however, makes the change clear. For whatever reason--we don't know, or need to know--the wealthy are paying a smaller portion of a larger amount of money. This explains how they can be paying less in relation to themselves, but more in relation to others, and so is the correct answer.

Hope this helps!

DOUBT

Earlier 1% group income 100 tax paid 20$, then tax rate 20%. Later Income 1000 tax paid 20$, tax rate 2%. This expalins decrease of tax rate
But they group is still paying 20$how will the 1% account for a larger portion of the federal tax revenue. Thanks _________________ If you found the reply to be helpful, give kudos. Manager Joined: 04 Aug 2010 Posts: 158 Followers: 2 Kudos [?]: 26 [0], given: 15 Re: Kaplan CR [#permalink] 08 Sep 2010, 05:46 BlueRobin wrote: Earlier 1% group income 100 tax paid 20$, then tax rate 20%.
Later Income 1000 tax paid 20$, tax rate 2%. This expalins decrease of tax rate But they group is still paying 20$ how will the 1% account for a larger portion of the federal tax revenue.
Thanks

You can't really say it can't account for the larger portion of the federal tax unless you know the remaining 99% of population is paying the same amount of tax as before.
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Re: Kaplan CR [#permalink]  08 Sep 2010, 08:25
FQ wrote:
BlueRobin wrote:
Earlier 1% group income 100 tax paid 20$, then tax rate 20%. Later Income 1000 tax paid 20$, tax rate 2%. This explains decrease of tax rate
But they group is still paying 20$how will the 1% account for a larger portion of the federal tax revenue. Thanks You can't really say it can't account for the larger portion of the federal tax unless you know the remaining 99% of population is paying the same amount of tax as before. If you were trying to explain my doubt then i lost you, Are you saying one should assume that the 1% group is paying more than 20$?
My doubt there is no mention that the 1% started paying more tax, then if its not mentioned how can one conclude based on one`s own imagination.
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Re: Kaplan CR [#permalink]  14 Sep 2010, 05:34
I think B
Re: Kaplan CR   [#permalink] 14 Sep 2010, 05:34

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