In Region X, all rights to use water from the Dusty River were

Question

In Region X, all rights to use water from the Dusty River were allocated to farms at a government auction held more than a century ago. To increase long-term tax revenue generated by the region’s farms, the government now plans to allow holders of water rights to sell those rights freely. The government reasons that this will ensure that more water is allocated to those farms able to use it more profitably.

To assess how successful the government's plan, if implemented, is likely to be in increasing tax revenue, it would be most helpful to know

A. which farms received rights to the most water at the government auction
B. whether farms that cannot most efficiently use water would be adversely affected if the government took away their water rights
C. whether the sale of water rights would be taxable
D. what steps other than changing the allocation of water rights the government could take to increase tax revenues from farms
E. how taxes on the region’s farms vary with those farms’ profits

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Official Answer

E

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MartyMurray · Accepted Answer

In Region X, all rights to use water from the Dusty River were allocated to farms at a government auction held more than a century ago. To increase long-term tax revenue generated by the region’s farms, the government now plans to allow holders of water rights to sell those rights freely. The government reasons that this will ensure that more water is allocated to those farms able to use it more profitably.

Goal of the plan:

To increase long-term tax revenue generated by the region’s farms

The plan:

allow holders of water rights to sell those rights freely

Rationale for the plan:

this (allowing holders of water rights to sell them) will ensure that more water is allocated to those farms able to use it more profitably

We see that the idea of the plan is that, by allowing water rights to be sold, the government will cause water to be used more profitably by farms, and the end result will be that "long-term tax revenue generated by the region's farms" will increase.

One thing we might notice about the rationale for the plan is that it jumps from "more profitably" to "increase long-term tax revenue" without indicating how exactly the two are connected. In other words, it appears to depend on the assumption that increases in profits will result in increased tax revenue.

To assess how successful the government's plan, if implemented, is likely to be in increasing tax revenue, it would be most helpful to know

This is an Evaluate question, and the information mentioned by the correct answer will weaken or strengthen the case for the plan's success.

A. which farms received rights to the most water at the government auction

This information does not help with determining whether the plan will succeed.

After all, as long as water rights will go to farms that can use them more profitably, the plan should work, regardless of which farms got them at the original auction.

Eliminate.

B. whether farms that cannot most efficiently use water would be adversely affected if the government took away their water rights

This choice is tricky because, if some farms would be adversely affected as a result of implementation of the plan, then it's likely that tax revenue from those farms would decrease, an outcome that would be counter to the success of the plan.

At the same time, there are two reasons why this choice is incorrect.

One is that the plan is not for the government to  take away  water rights. The plan is to  allow  farms to sell water rights. So, this choice involves a plan other than the one presented.

The other is that, even if some farms would be adversely affected, implementation of the plan should still result in an increase in overall profitability of farms. After all, the idea is that farms that use water with relatively low profitability would sell their rights to farms that would use it more profitably. So, even if some farms' profits were to decrease as a result of a reduction in their access to water, the net effect should still be an increase in profits.

So, the plan could succeed regardless of whether the profitability of some farms would be adversely affected.

Eliminate.

C. whether the sale of water rights would be taxable

This choice is tricky because, if the answer to it is that the sale of water rights would be taxable, then the implementing the plan could result in an increase in tax revenue.

At the same time, this choice is incorrect because the goal of the plan is "to increase long-term tax revenue generated by the region’s farms," and tax revenue occasionally generated by taxation of water rights sales would not be "long-term tax revenue generated by the region’s farms."

It's true that the question stem does not use the wording "long-term tax revenue." So, if we go only by what we see in the question stem, we could make a case for this choice. At the same time, we can make the judgment call that what matters is the stated goal of the plan and eliminate this choice, partly because (E) is more clearly correct.

Eliminate.

D. what steps other than changing the allocation of water rights the government could take to increase tax revenues from farms

The information mentioned by this choice does not indicate anything about the prospects for success of the plan.

After all, information on what other steps the government could take to increase revenue would not indicate whether this particular plan of allowing water rights sales will work.

Eliminate.

E. how taxes on the region’s farms vary with those farms’ profits

This choice is interesting.

The rationale of the plan is the following: Allowing the sale of water rights will cause water to be used more profitably, with the presumed result of an increase in farm profits, which is expected to result in an increase in tax revenue.

What's missing from that rationale is a connection between increased farm profits and increased tax revenue. Is farm tax revenue related to farm profits? The passage doesn't say one way or the other.

So, the information mentioned by this choice is key to assessing the likelihood that the plan will work.

After all, if taxes on farms do not vary with farm's profits, then increasing farm profitability through allowing sales of water rights won't have any effect on tax revenue.

On the other hand, if taxes on farms vary directly with farm's profits, then there's reason to believe the plan will work.

Keep.

Correct answer:   E

Abhishek009 · Answer

The objective is "To increase long-term tax revenue"

(A) Irrelevant which firm received rights to increasing  long-term tax revenue.
(B) Irrelevant as it doesn't address the issue of increasing long-term tax revenue.
(C) If it is it will lead to tax revenue, but it will be short term (Only at the time of transaction, like property tax - A one time affair) it doesn't address the issue of increasing long-term tax revenue.
(D) steps other than changing the allocation of water rights - Out of scope.
(E) If TAx varies with profitability - it will keep generating   long-term tax revenue.

Answer will be (E)

sachi-in · Answer

Summary  : Selling water rights in free market by Farms -> More profit in long term for government

Prethinking  : weak link is - how does profit from farms transmute into profits for govt. ?

C. whether the sale of water rights would be taxable  -  Valid point that is in line with prethinking - Keep
E. how taxes on the region’s farms vary with those farms’ profits - Valid point that is in line with prethinking

Now  C. is weak  becuase sale of water may not be directly taxable yet bring profit to governments !
(  think of indirect taxation - maybe increased profit for farms will lead to increased consumption power of farmer - increased profit for government through consumption tax or goods services tax etc.  )

E is correct option

I think the dilemna between option C and E give rise to the actual difficulty in this question.

RenanBragion · Answer

Goal is to increase long term revenue tax. A, and B are out. C would not be about revenue tax, it’s about the sale of the rights to explore water. So it’s out. D is out because we are not questioning whether there are other ways to do it, we are questioning whether this method works, so it’s out of scope

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Gemmie · Answer

Answer is E

If farms with higher profits pay significantly more taxes, then the plan has a higher chance of success.
If taxes are flat or based on land ownership (not profit), the plan might not achieve the desired outcome.

Gemmie · Answer

To assess how successful the government's plan, if implemented, is likely to be in increasing tax revenue, it would be most helpful to know:  E. how taxes on the region’s farms vary with those farms’ profits

This information is crucial because the government's plan hinges on the idea that reallocating water rights to the most profitable farms will lead to increased farm profits, which in turn should lead to higher tax revenue. Understanding the relationship between farm profits and tax revenue will help determine if the increase in farm profitability due to better water allocation will translate into a significant increase in tax revenue for the government.

SKGM · Answer

"To increase long-term tax revenue generated by the region’s farms.."- it means govt will impose tax on the revenue generated by ther firms. Now, if Tax rule of Region X is based on profit generated by the firm, then tax revenues varies.

Example 1. If firm accrures no profit -- then there will be no tax to be imposed on that firm. 
Example 2. If firm generates profit -- tax will be imposed on the profit resulting tax revenue for Region X.

That what option E denotes.

The argument shows that Region X will generated long-term tax revenue NOT sale tax on transfer of water right. Argument also shows that Region X is interested in generating long term tax revenue. Whereas, transfer of water right is one time transaction. So, we can negate option C.

jeet1204 · Answer

I think B is a good solution too. When you think about it, if the ones using water inefficiently are adversely affected, their profits would decline significantly which would lead to decreased tax revenue for the government.

Pragya9s · Answer

B states that - whether farms that cannot most efficiently use water would be adversely affected if the government took away their water rights  
 
It is irrelevant because there is no where mention that government will take away their rights and this points deviates from the topic which asks us to assess government's plan which would support the aim to increase Long term tax revenue through increase in profitability. And hence option E would rightly help us evaluate the statement.

Purnank · Answer

Thanks. I think B fails because not able to tell anything about potential tax revenue. So evaluation of current tax system is beneficial here. Yes E is right.

Blackcrow1972 · Answer

Option E
The government’s plan aims to increase tax revenue by allowing water rights to be sold freely, under the assumption that farms that use water more profitably will generate more taxable income. To evaluate whether this plan will succeed, it is critical to know whether and how farm profits translate into increased tax revenue. For example, if farm profits are not strongly tied to tax revenue (due to exemptions, low tax rates, or other factors), the plan might not achieve its goal even if more water is allocated efficiently.

KarishmaB · Answer

Situation :Rights to use water were allocated to farms at an auction 100+ years ago. Plan : Allow holders of water rights to sell those rights freely. So more water will go to those farms able to use it more profitably. (More profitable farms can buy rights) Aim of the Plan : To increase long-term tax revenue generated by the region’s farms What will help us in evaluating whether tax revenue will increase? A. which farms received rights to the most water at the government auction The exact name of farms that received those rights is irrelevant. More information on the profitability etc of this farms could have been useful. B. whether farms that cannot most efficiently use water would be adversely affected if the government took away their water rights 'Taking away water rights' is outside the scope of our plan. C. whether the sale of water rights would be taxable Well, this will tell me whether the tax revenue will increase. Hold. D. what steps other than changing the allocation of water rights the government could take to increase tax revenues from farms Other methods of increasing tax revenue are out of scope. E. how taxes on the region’s farms vary with those farms’ profits This is good. Do more profitable farms give more tax will help us figure out whether there will be long term tax revenue increase. If all farms pay $100 tax say every year, then no. But if they pay 20% of their profits then yes. So how taxes vary with profits is useful to know. At this point, we need to compare (C) with (E). We know that both will help us in answering whether tax revenue will increase but if we focus on the "aim" which is long term tax revenue increase then we know that option (E) is correct. Option (C) may add to tax revenue at the time of sale but not long term. Taxes on profits of the farm will be long term. Answer (E) A discussion on a useful to evaluate question: https://youtu.be/1JtHjH1lWZc

PG695 · Answer

Got it wrong (C) in the mock. Now, after reviewing this, I can see what is missing in the choice I picked.

C. whether the sale of water rights would be taxable

-> If it's taxable, good. But how does it work? Does it work in the way that increases long-term tax revenue for the government? We don't know because the question only ended there.

E. how taxes on the region’s farms vary with those farms’ profits

-> Now this is more like it. Not only we will know if it's taxable or not, but also how it works. This will help us answer whether the taxation scheme allows the government to earn more long-term revenue from tax or not.

It's pretty scary to experience how a tiny difference could lead to a devastating wrong turn under time pressure first-hand.

Anyway, E is the correct answer.

In Region X, all rights to use water from the Dusty River were

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In Region X, all rights to use water from the Dusty River were