priyalr wrote:
Hi Mike,
You are right with what ou said in the end about understanding the discrepancy and look at ans choices. I read the stimulus, but couldn't really figure out the discrepancy. I moved on with options, i figured out with B or C as correct option, but i marked C. Quite often I end up selecting the wrong ans choice among 2 options, what do you suggest. I dont want to work on a CR qustn for more than 2 min.
Thanks,
From the discussion above, I think many of us consider option B & option C to be the two major contenders for the answer. However, some of us are, ultimately, falling for the wrong guy, option C. I think, in our discussion above, we have missed one crucial point, which is very apparent in the question passage and which is missed by option C.
Let me offer my two cents to the discussion.
As Mike has very brilliantly explained the paragraph of the question, the paragraph states two things about period 1977 to 1989:
1. The proportion of income paid to federal taxes by the richest (i.e. top 1%) people has decreased.
2. Proportion of federal taxes contributed by the richest has increased
Now, option C says that many of the richest people shifted their investments from non-taxable to taxable assets. Now, such a thing would have impact on both the above statements. Though such a move by the richest would help explain statement 2, it would run completely counter to statement 1, since this option talks about increased tax outflow from the richest, without suggesting any corresponding increase in the income of the richest. Thus, this option leads to increased proportion of income paid to taxes, which is opposite of statement 1.
I hope the above explanation removes option C from the race, leaving us with only option B.
If anyone finds any issues with this, I would be grateful if you point it out.
I would also like to use this forum to emphasize one very important point here. We should never use outside knowledge to judge the validity of any statement. The reason is simple that the critical reasoning questions are designed to test your reasoning skills, not your knowledge. They are not designed to favor people possessing certain knowledge (which, in this case, could be about the tax regime in 1980s in the US). Official GMAT website clearly states this in the test structure of GMAT.
I am emphasizing this because I see that Mike’s argument for not going for option C begins with “First of all, there's no historical evidence for that...”. This is an incorrect approach to attempt critical reasoning questions.
Even the second part of this argument is fallacious. The second part says that:
“If the tax rate declines, maybe some 1% folks move a little more from tax shelters to something taxable, but it simply doesn't make sense that person would move so much that the overall dollar amount in taxes paid increases to more than what it was at the higher tax rate. It's unlikely one person would do that, and it's unimaginable that "many" of the 1% would do something so daft. “
Looking closely at the argument, a question arises, why would even some people move some proportion of their assets, if the tax rate was lowered? No-tax is always better than lower tax. Why would some people do that?
They would do only when the after-tax return on taxable investments becomes greater than return on non-taxable income. So, when the tax rate is lowered to such an extent that after tax return on taxable assets become greater, people would start switching to them, thereby increasing tax revenues for the government. And in this case, they may shift their entire assets to taxable ones, which would possibly generate enough taxes for the government, to more than offset the decrease in tax rate.