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# When people evade income taxes by not declaring taxable

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01 May 2005, 04:27
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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.
[Reveal] Spoiler: OA
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15 Sep 2005, 14:30
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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.

Taxpayers would want to lower pretax
(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 years to
year.

If true, the cycle wouldn't be so "vicious"
(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.

CORRECT, lawmakers aren't allowing for lost revenue, thus the vicious cycle continues.

(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.

Fines are not mentioned.
(E) Taxpayers do not differ from each other with respect to the rate of taxation that will cause
If taxpayers did not differ they all would evade, or they all wouldn't. There wouldn't be increases in evasion that resulted from increases in rates.
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12 Jul 2008, 16:00
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More variety :
I’d pick C.

Quote:
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?

We need to find a statement, a negation of which will break the ‘vicious circle’:

(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. - This is it: if it is false, i.e. lawmakers allow adequately for revenue that will be lost through evasion, then the statement that ‘Tax evasion forces lawmakers to raise income tax rates’ will also be false, and ‘a vicious cycle’ will not take place.
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13 May 2008, 06:03
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Cycle : Tax Evasion -> Taxes are raised -> Burden on nonevading tax payers -> more taxpayers evade taxes.
How can we break this cycle. Either by ensuring that there is absolutely no Tax Evasion by tax payers, or some way for lawmakers to not raise taxes at all despite evasion.

lexis wrote:
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.
>> This does not break the chain in any way.

(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 years to year.
>> This can potentially reduce the tax evasion, but not sufficient for law makers to Not raise taxes or avoid evasion completely.

(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 they establish rates in such a way that their revenues are met despite evasion, they are likely to not raise taxes which is what we were looking for to break the cycle.

(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.
>> If fines are raised potentiall evasion can be reduced, but we dont know if it can be eliminated 100%.

(E) Taxpayers do not differ from each other with respect to the rate of taxation that will cause them to evade
taxes.
>> Even if taxpayers differ, ie. people with higher rates evade more often than people with lower rates. We still cant break the cycle.
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17 Jun 2016, 02:02
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Explaination :-
It is always advisable to break the argument into premise and conclusion in simple language. Lets do it quickly
Premise 1) Tax evasion by cheaters increases the tax burden on honest taxpayers who pay tax properly.
Premise 2) This increased tax burden encourages honest taxpayers to become cheaters and start to evade income taxes themselves.
Conclusion) Therefore by not paying tax, cheaters convert honest people into cheater. This causes a vicious cycle.

Now the conclusion rest on good taxpayers becoming bad cheaters.
What if:- the lawmakers already know that many cheaters will not pay tax and the lawmakers simply have made the tax structure in such a clever way that the loss in revenue caused by non taxpaying cheaters is already compensated by some other method. In other words the lawmaker already know how much income tax will they will get.
Since the collected income tax is within their estimate, there is no reason for the lawmaker to increase the tax rate . Since there is no change in ta rate ,thus the honest people will not become cheaters and thus there will be no vicious cycle. IN OTHER WORDS :- IF LAWMAKER DO NOT HAVE OTHER METHOD TO COMPENSATE FOT THE LOST REVENUES THEN ONLY THIS VICIOUS CYCLE WILL HAPPEN.

Question ask us :- The vicious cycle described above COULD NOT result UNLESS which of the following WERE TRUE ??
(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.

YES.... WHEN LAWMKER DID NOT COMPENSATE FOR LOST REVENUE,THEY WILL BE STUNNED AFTER SEEING COLLECTION FROM INCOME TAX. THEY WOULD BE EXPECTING 25 MILLION IN TAX BUT THEY WILL GET ONLY 5 MILLION. THEY WILL THINK :- OH GOD I CANNOT RUN THIS GOVERNMENT SUCH LESS MONEY. I NEED TO INCREASE THE TAX NEXT YEAR TO GET SOME MORE MONEY FROM INCOME TAX.

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.
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15 Sep 2005, 14:11
Here are the choices:

(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 years 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

Can somebody explain what does the question mean? I think it means 'if which of the following were true, then the vicious cycle will not happen?'
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15 Sep 2005, 14:19
ranga, can you plz explain the questiion and your answer c plz?
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15 Sep 2005, 14:25
I think C is the right answer.

Because....When lawmakers establish income tax rates in order to generate a certain level of revenue, they do not allow adequately for .... this is the reason the vicious cycle continues. If the lawmakes had adequate fund the problem stated would not exist.
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hey ya......

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15 Sep 2005, 14:26
saurya_s wrote:
Here are the choices:

(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 years 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

Can somebody explain what does the question mean? I think it means 'if which of the following were true, then the vicious cycle will not happen?'

The question means which of the following answer is a must for the argument above. This means you need to pick one from the answer list such that it will give you a complete argument. The vicious cycle in the passage need one additional element to make it works.
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15 Sep 2005, 14:26
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saurya_s wrote:
ranga, can you plz explain the questiion and your answer c plz?

Viscious Cycle --> People evade tax so law makers make less revenue so they increase tax so more people evade tax

This cycle would not happen if law makers had given leeway for evaders and fixed the tax such a way that they will generate their income, in which case they dont have to increase their tax every year and more people will not start evading.
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15 Sep 2005, 17:24
I agree with ranga41. The argument falls apart when you apply the negation test to C.
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16 Sep 2005, 02:06
I don't understand the meaning of question here? Seems to negative= not and unless? Can some one explain the meaning of unless?
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04 Sep 2007, 18:05
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.
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04 Sep 2007, 21:44
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C - if the lawmakers had made reservations for people evading taxes the vicious cycle would not have occurred.
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04 Sep 2007, 23:48
I also go for C. That's the only choice that would keep the cycle going. All others has the possibility of breaking the cycle.

But what is the source? Doesnt look like a GMAT type question!!!
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12 May 2008, 02:53
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 years 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.
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12 May 2008, 03:37
lexis wrote:
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 years 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.

IF IRS does not consider this point the viscious cycle will happen. Hence its C.
(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.
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11 Jul 2008, 07:01
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 years 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.

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11 Jul 2008, 07:10
IMO B.
If tax evading techniques catch the defaulters and produce net profit, then there is no need to raise tax.
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11 Jul 2008, 11:57
IMO D

Lowering the tax rates or increasing the fine will invite evaders to pay tax properly and vicious cycle will not result.

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