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Businesses are suffering because of a lack of money

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Businesses are suffering because of a lack of money [#permalink] New post 22 Feb 2012, 11:29
00:00
A
B
C
D
E

Difficulty:

  35% (medium)

Question Stats:

54% (02:24) correct 45% (01:33) wrong based on 95 sessions
Businesses are suffering because of a lack of money available for development loans. To help businesses, the
government plans to modify the income-tax structure in order to induce individual taxpayers to put a larger
portion of their incomes into retirement savings accounts, because as more money is deposited in such
accounts, more money becomes available to borrowers.
Which of the following, if true, raises the most serious doubt regarding the effectiveness of the government's
plan to increase the amount of money available for development loans for businesses?
(A) When levels of personal retirement savings increase, consumer borrowing always increases
correspondingly.
(8) The increased tax revenue the government would receive as a result of business expansion would not
offset the loss in revenue from personal income taxes during the first year of the plan.
(e) Even with tax incentives, some people will choose not to increase their levels of retirement savings.
(D) Bankers generally will not continue to lend money to businesses whose prospective earnings are
insufficient to meet their loan repayment schedules.
(E) The modified tax structure would give all taxpayers, regardless of their incomes, the same tax savings for
a given increase in their retirement savings.

Why is E wrong?
[Reveal] Spoiler: OA
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Re: tax incentives [#permalink] New post 22 Feb 2012, 16:45
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Hi, there. I'm happy to help with this. :)

The argument:
Businesses are suffering because of a lack of money available for development loans. To help businesses, the government plans to modify the income-tax structure in order to induce individual taxpayers to put a larger portion of their incomes into retirement savings accounts, because as more money is deposited in such accounts, more money becomes available to borrowers.

In a nutshell --- if we tweak the tax system to encourage folks to put more into their retirement accounts, then presto, more money for loans will be available to business.

Prompt:
Which of the following, if true, raises the most serious doubt regarding the effectiveness of the government's plan to increase the amount of money available for development loans for businesses?

So, which answer effectively says -- make those changes to the tax code, and there won't be as much money for loans available to business?

(A) When levels of personal retirement savings increase, consumer borrowing always increases correspondingly.
OK, so when people put more into their retirement, they wind up borrowing more. That would mean, private citizens en masse would be competing with business for that loan money --- that would mean less money for loans available to business. A possible right answer.

(B) The increased tax revenue the government would receive as a result of business expansion would not offset the loss in revenue from personal income taxes during the first year of the plan.
Making this change to the tax code could wind up hurting the government --- interesting, but not relevant to the argument. The argument is strictly about: will business have more money available for loans? What happens to the government is irrelevant to this argument. (B) is out.

(C) Even with tax incentives, some people will choose not to increase their levels of retirement savings.
This argument above is a macroeconomics argument. It's about changes in the entire tax-system, the entire banking system, etc. Of course, not every private citizen will follow the tax incentive. Tax incentives are given with the idea that only a certain percentage of the population will respond to them. So, some private citizens won't respond to the tax incentive. So what? That's 100% predictable, and not relevant to the big macroeconomic argument at hand. (C) is out.

(D) Bankers generally will not continue to lend money to businesses whose prospective earnings are insufficient to meet their loan repayment schedules.
Well, anyone -- a household or a business --- that fails to meet loan payments is not going to be wildly successful getting more loans. That's pretty obvious. There's absolutely nothing in the original argument suggesting that the businesses discussed are so strapped for money that they all are defaulting on their loans. The business are "struggling" insofar as they can't take out loans to fund R&D, which would grow already thriving businesses. My business is making money already, and I want to to R&D to grow it, but there's no money for loans so I can pursue that R&D --- that's the problem we are addressing, according to the original argument. The problem of some business defaulting on their loans --- that's something separate, not relevant to this argument. (D) is out.

(E) The modified tax structure would give all taxpayers, regardless of their incomes, the same tax savings for a given increase in their retirement savings.
Again, this is a macroeconomic argument. What matters it the total revenue taken in by the government. Let's say, because of this tax code change, retirement accounts get an additional $1 billion, and that new money is available for loans to business. That $1 billion could have come from everybody in the whole socioeconomic spectrum making an equal contribution, or it could have come from rich people putting in much much more than middle class people. From the business standpoint, once they have that $1 billion available for loans, they don't give a flying figtree where it came from. From the business point of view, it's completely irrelevant how the government goes about raising that money; the specifics of allocation by various socioeconomic classes doesn't matter at all. (E) is out.

Thus, answer (A) is the only one that poses a direct attack on the argument, so that's the answer.

Does that make sense?

Here's another free CR practice question of a similar type.

http://gmat.magoosh.com/questions/1257

The question at that link should be followed by a free video with a complete explanation of the solution, once you submit you answer.

Let me know if you have any other questions.

Mike :)
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Re: tax incentives [#permalink] New post 23 Feb 2012, 09:42
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Dear devinawilliam83

That's a good point you make. It's absolutely true that they could do a good job or a not-so-good of designing the tax incentive. It's absolutely true that some not-so-good tax incentive schemes "would give all taxpayers, regardless of their incomes, the same tax savings for a given increase in their retirement savings." But consider this.

First of all, that information is given in the form of a slope or a function. It's not that everyone, regardless of increase in retirement savings, gets a single flat deduction on their taxes. That's not what it's saying. No, rather, everyone gets the same tax savings for each particular given increase in retirement savings. If two people, at different income levels, increase their retirements the same amount, their taxes are decreased the same amount. That doesn't mean that you can't reduce your taxes more by putting more in retirement. This restraint completely leaves open the possibility of: if you save more, you pay less in taxes. For extreme simplicity, let's say that the function is just a 1-to-1 ratio --- that it, for every dollar I increase my retirement savings, I can deduct that dollar from my taxes. Middle income John Q Public puts an extra $600 in retirement, and therefore saves $600 in taxes. If Chester Moneybags also puts an extra $600 in retirement, he also saves $600 in taxes, but if he puts an extra $750,000 in retirement, he saves $750,000 in taxes. Of course, he would be a fool not to do the latter if he could. Sizable deductions (percentage-wise) are relatively plentiful for folks with low or middle income, but when you get into upper echelons of the tax brackets, getting huge percentage deductions is much trickier. If anything, this scheme could wildly motivate the very rich to shovel money into retirement funds.

It's also true that, designing the tax incentive one way, a lot of the increase in retirement funds would come from the middle class (that could actually be a ton of money, if every single middle income household kicks in). Designing the tax incentive another way, a lot of the increase in retirement funds would come from the super-rich. I'm no expert on tax law, but it seems to me that you have the equal tax break for equal increase in retirement funds thing and still have the incentive slant either way. The point it: as long as they get the money they need, it doesn't matter one whit to the businesses how they do it.

It's 100% true that the tax-incentive plan could be incredibly poorly designed and not accomplish its goal. It's also quite true that it could be a work of sheer genius that works flawlessly, raises even more revenue than expected, and makes everyone happy. Either of those could be the case, and we don't know. Simply from knowing "The modified tax structure would give all taxpayers, regardless of their incomes, the same tax savings for a given increase in their retirement savings", we have no idea whether it will be a very well designed or very poorly designed tax package.

IN GMAT CR, when you are asked one of these "which most weakens the argument" questions, you can't afford to get into a sea of hypotheticals. "If (E) is true, and then this, and then also that -- then all of that together would hurt the argument" ---- that's not a recipe for success on these question. When you are asked "which most weakens the argument", one of the five really throws a brick through the argument. Here, that's (A): when middle class folks put more in retirement, they borrow more. BAM. Right there, less money for the businesses. No ambiguity, no hypotheticals. If you find an answer choice in which one possible way to interpret it or one possible way to imagine it playing out hurts the argument, that's not it. You want something that needs as little interpretation as possible: just what it says directly hurts the argument.

Does all this make sense? Please let me know if you have any further questions.

Mike :)
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Re: tax incentives [#permalink] New post 22 Feb 2012, 20:31
Quote:
The modified tax structure would give all taxpayers, regardless of their incomes, the same tax savings for a given increase in their retirement savings.
Again, this is a macroeconomic argument. What matters it the total revenue taken in by the government. Let's say, because of this tax code change, retirement accounts get an additional $1 billion, and that new money is available for loans to business. That $1 billion could have come from everybody in the whole socioeconomic spectrum making an equal contribution, or it could have come from rich people putting in much much more than middle class people. From the business standpoint, once they have that $1 billion available for loans, they don't give a flying figtree where it came from. From the business point of view, it's completely irrelevant how the government goes about raising that money; the specifics of allocation by various socioeconomic classes doesn't matter at all. (E) is out
E) .

Thanks am just wondering - if the tax incentives are not good enough to incentivise the richer sections who have the means to contribute more, then there is a possibility that the scheme will not collect as much funds thus reducing the loan'ability' ..
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Re: tax incentives [#permalink] New post 23 Feb 2012, 11:37
That was helpful Mike, Thanks
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Re: Businesses are suffering because of a lack of money [#permalink] New post 10 May 2014, 03:04
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