Soumyasrinivas wrote:
Official Guide for GMAT Verbal Review, 2nd Edition
Practice Question
Question No.: 69
Page: 144
Difficulty:
When people evade income taxes by not declaring taxable income, a vicious cycle results. Tax evasion forces lawmakers to raise income tax rates, which causes the tax burden on nonevading taxpayers to become heavier. This, in turn, encourages even more taxpayers to evade income taxes by hiding taxable income.
The vicious cycle described above could not result unless which of the following were true?
(A) An increase in tax rates tends to function as an incentive for taxpayers to try to increase their pretax incomes.
(B) Some methods for detecting tax evaders, and thus recovering some tax revenue lost through evasion, bring in more than they cost, but their success rate varies from year to year.
(C) When lawmakers establish income tax rates in order to generate a certain level of revenue, they do not allow adequately for revenue that will be lost through evasion.
(D) No one who routinely hides some taxable income can be induced by a lowering of tax rates to stop hiding such income unless fines for evaders are raised at the same time.
(E) Taxpayers do not differ from each other with respect to the rate of taxation that will cause them to evade taxes.
Dear Mike,
The OA for this question is C. This went over my head!!! Was unable to pick the answer at all! Please guide!!
Thank you
Regards
Soumya
Dear
Soumya,
Thank you very much for giving such precise information about the source of this question. I am happy to help.
This, of course, is a very high quality question, as all official questions are. It's also very tricky and subtle. I'll point out: when you get a CR question about a topic that doesn't make sense, one thing I'll suggest is: read up on that topic. Even if you simply go to Wikipedia and read about tax evasion. Find some news analyses of tax evasion. Make it a mini-research project to read in depth about this topic a bit. Then, once you have learned a little more about the topic, go back to the question and see whether it makes sense. The GMAT CR is funny. Technically, you don't need outside information to answer any question, but you definitely need to have a general sense of the business world, of the decisions that real-world people make with money, etc. in order to have insight into the CR arguments. Here's the first in a series of articles that provides some real world background that can be helpful in interpreting CR questions.
https://magoosh.com/gmat/2012/gmat-supply-and-demand/So for this question, there's a vicious loop.
1) People don't want to pay so much in taxes, so they illegally hide taxable income, and evade taxes.
2) Lawmakers don't get as much as they were expecting from the tax revenue, because of evasion, so they raise taxes.
3) Now, taxes are higher, and people have even more incentive to hide taxable income and evade taxes.
There are two parties, the lawyers and the tax payers, and each one, for totally rational and understandable reasons, responds to the action of the other in way that exacerbates the problem. That's a vicious loop.
Now, the prompt is difficult: "
The vicious cycle described above could not result unless which of the following were true?" This is hard because of the double-negative construction ("
not" + "
unless"). In other words, this means:
"In order for the vicious cycle to occur, which of the following MUST be true?"
In other words, for the correct answer, if it is true, the vicious cycle can happen, but if it's not true, the vicious cycle couldn't happen. Negating it makes the vicious cycle impossible. That's very important.
For incorrect answers, the vicious cycle could still occur even if we negate the answer: the answer is not strictly necessary for the cycle to occur.
To test the answers, we will need to negate them. The one which, when negated, makes the vicious cycle impossible, is the correct answer.
Now, let's look at the answers.
(A) An increase in tax rates tends to function as an incentive for taxpayers to try to increase their pretax incomes.
Negation: increasing taxes does not motivate folks to make more money. Going out and making more money is not necessarily an easy thing to do, and it's a little beyond the scope. When the tax rate increase, the argument suggests people respond with more tax evasion. Maybe some people respond by trying to get higher paying jobs, whether this occurs or not does not appear to affect the vicious cycle. This is incorrect.
(B) Some methods for detecting tax evaders, and thus recovering some tax revenue lost through evasion, bring in more than they cost, but their success rate varies from year to year.If the methods for detecting tax evaders consistently cost
more than the money they recovered, then there would be no reason to conduct them, and they would have no affect on the argument. This is incorrect.
(C) When lawmakers establish income tax rates in order to generate a certain level of revenue, they do not allow adequately for revenue that will be lost through evasion.If lawmakers included tax evasion in their calculations when they set taxes, then they would just set the taxes once, taking tax evasion into account, and when real people evaded their taxes, the lawmakers would still get exactly what they predicted they would, so they would not absolutely no incentive to raise taxes any further. This would drastically break the vicious cycle. If this is not true, there is no vicious cycle, so this must be absolutely necessary for the cycle to occur. This is correct.
(D) No one who routinely hides some taxable income can be induced by a lowering of tax rates to stop hiding such income unless fines for evaders are raised at the same time.The opposite of none is some. Suppose some folks, maybe 1% of the population, could be induced to stop hiding taxable income if the tax rate went down --- suppose they were motivated to do so, even if penalties didn't change. Well, that alone would not break the vicious cycle, because as long as most people are still evading, the lawmakers will not get the tax revenue they were expected, so they will raise taxes, and one taxes go up, even this 1% would adopt the behavior of hiding taxable income. The vicious cycle only depends on people's behavior when taxes go up, not when they go down. This is incorrect.
(E) Taxpayers do not differ from each other with respect to the rate of taxation that will cause them to evade taxes.The argument directly implies that this is not true. If the taxes are at one level, and some people evade taxes, and then the taxes go up, and more people evade, it means that the new evaders were not motivated to evade taxes at the previous tax level, but at the new tax level they are motivated to evade. That means, these new evaders are motivated to evade at a different level from that of the folks who were evading at the previous, lower tax level. If the argument directly implies that a statement is false, then that statement cannot be necessary to the argument. This is incorrect.
The only possible answer is
(C).
Does all this make sense?
Mike
_________________
Mike McGarry
Magoosh Test PrepEducation is not the filling of a pail, but the lighting of a fire. — William Butler Yeats (1865 – 1939)