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QOTD: When people evade income taxes by not declaring taxable

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QOTD: When people evade income taxes by not declaring taxable  [#permalink]

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Verbal Question of The Day: Day 230: Critical Reasoning


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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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QOTD: When people evade income taxes by not declaring taxable  [#permalink]

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New post 26 Feb 2018, 07:12
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This passage actually starts off with the conclusion: "When people evade income taxes by not declaring taxable income, a vicious cycle results."

The rest of the passage explains how this vicious cycle occurs:

  • "Tax evasion forces lawmakers to raise income tax rates." - When people evade taxes, the government loses tax revenue. In order to compensate for the lost revenue, lawmakers are forced to raise income tax rates.
  • Raising income taxes "causes the tax burden on nonevading taxpayers to become heavier." - The people who evade taxes are not contributing any money. Meanwhile, the people who DO pay their taxes will have to pay even more as tax rates are raised. In other words, nonevading taxpayers have to pay even more to make up for the amount that the evaders SHOULD be paying.
  • "This, in turn, encourages even more taxpayers to evade income taxes by hiding taxable income." - As tax rates are raised, those who actually pay taxes will have to pay even more. The increasing financial burden causes more and more people to hide taxable income (in order to reduce the amount of taxes they have to pay).

If even more taxpayers decide to evade income taxes, the lawmakers will have to increase tax rates even further to compensate for lost tax revenue. But that will cause even MORE taxpayers to evade income taxes... and so on and so on. This is what the author means by, "a vicious cycle results."

But this vicious cycle could NOT result unless one of the following were true. In other words, if the vicious cycle could still occur regardless of whether an answer choice is true, then that answer choice should be eliminated:

Quote:
(A) An increase in tax rates tends to function as an incentive for taxpayers to try to increase their pretax incomes.

Choice (A) suggests that people will try to increase their pretax incomes to make up for increased tax rates. That way, their post-tax incomes will be about the same, despite the increase in tax rates. This is one way for people to deal with increased taxes aside from evading their taxes!

But if (A) were not true, it would support the idea that more people will evade taxes as tax rates are increased. Instead of trying to raise their pre-tax incomes, most people will be faced with lower post-tax incomes. That would give more people incentive to evade taxes, thus feeding into the cycle described above.

So we don't NEED choice (A) to be true in order to have a vicious cycle. In fact, if (A) were true, it would work against the argument by describing something that could help break the vicious cycle. Eliminate (A).

Quote:
(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.

This would actually work against the argument by suggesting that the government might be able to recover some tax revenue without raising taxes. If (B) were true, then it might be possible to slow or even break the vicious cycle.

We don't need choice (B) to be true in order to have a vicious cycle, so eliminate (B).

Quote:
(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.

Let's think about what would happen if lawmakers DID allow adequately for revenue that will be lost through evasion.

In other words, the lawmakers decide that they need some amount of tax revenue, and they set the tax rates accordingly. In doing so, they ASSUME that some people are going to evade income taxes. But that's okay because the lawmakers accounted for this in their calculations. So even though some people will evade taxes, the government is still getting all of the tax revenue that it expected to get.

In that case, there is no need for additional tax revenue and, thus, no need to increase tax rates! That means that the vicious cycle would be avoided. The vicious cycle described above could not happen unless choice (C) were true, so (C) looks good.

Quote:
(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.

Maybe some people WOULD stop evading taxes if tax rates were lowered, regardless of whether fines are raised. But if the government needs more tax revenue, tax rates will go UP, and the cycle will continue.

Choice (D) suggests that lawmakers might be able to break the cycle by raising fines and lowering tax rates, but the vicious cycle could occur even if (D) were not true. Thus, (D) should be eliminated.

Quote:
(E) Taxpayers do not differ from each other with respect to the rate of taxation that will cause them to evade taxes.

According to the passage, whenever taxes are increased, some amount of people (not everyone) will say, "Enough is enough! I'm going to hide some of my income to evade taxes!" When taxes are raised again, another group will say the same thing... and so on and so on.

The argument implies that the amount of people who evade taxes will increase gradually as taxes are increased. Choice (E) suggests that, once a certain tax level is surpassed, almost everyone will evade taxes! If this were true, there would be no "cycle". Instead, for any given tax rate, either 1) most taxpayers WILL evade taxes or 2) most taxpayers will NOT evade taxes.

Choice (E) would have to be false in order to have a vicious cycle, so eliminate (E).

(C) is the best answer.
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Re: QOTD: When people evade income taxes by not declaring taxable  [#permalink]

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New post 26 Feb 2018, 08:06
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 is part of the cycle. We need to find the part that starts the cycle.

(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. -Cost is out of scope

(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. If the lawmakers don't have adequate balances, then they have to increase the tax in order to increase the revenues.

(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. --This option would suggest to increase the tax always.

(E) Taxpayers do not differ from each other with respect to the rate of taxation that will cause them to evade taxes. --Difference between tax payers is out of scope
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Re: QOTD: When people evade income taxes by not declaring taxable  [#permalink]

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souvik101990 wrote:

Verbal Question of The Day: Day 230: Critical Reasoning


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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.

Every question of the day will be followed by an expert reply by GMATNinja in 12-15 hours. Stay tuned! Post your answers and explanations to earn kudos.



This question heavily relies on the ability to understand the Question stem. It subtly asks us to weaken the argument.

(A) An increase in tax rates tends to function as an incentive for taxpayers to try to increase their pretax incomes. If the increase in tax rates tends to function as an incentive for taxpayers to try to increase their pretax incomes, it kind of shows that by doing so, people would rather increase their taxable income, than decrease it. Therefore, it is contradictory to the argument.

(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.This does not have an effect on people choosing to disclose or hide their taxable income, because it lies in the suspension of uncertainty.

(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. Consider if the lawmakers did allow for the revenue that will be lost through evasion in their income tax rates, then they would still have enough revenue after the tax evasion and therefore, they would not have to raise the income tax rates any further (because they are already generating the required revenue even after tax evasion.) Therefore, no increase in tax rates wouldn't coax honest taxpayers to hide their taxable incomes and therefore, the vicious cycle would break.

(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 argument does not mention anything about lowering of tax rates. It only talks about raising of tax rates.

(E) Taxpayers do not differ from each other with respect to the rate of taxation that will cause them to evade taxes.If that is true, the change of tax rates would not make any difference to the number of tax payers despite the lawmakers raising or lowering tax rates. But, it does prove that if the lawmakers chose to raise income tax, more people would still hide their taxable incomes. Thus, vicious cycle would continue.
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QOTD: When people evade income taxes by not declaring taxable  [#permalink]

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New post 19 Apr 2018, 17:30
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Quote:
The vicious cycle described above could not result unless which of the following were true?


Can I replace unless with except and complete: cross out anything that ___ (the blank here is weakens)

Or:

Do I treat unless as a necessary condition (e.g. A student can not get higher grades in studies
unless he is consistent)

Hence, I need an answer choice that must be true to weaken the conclusion.

Quote:
In other words, if the vicious cycle could still occur regardless of whether an answer choice is true, then that answer choice should be eliminated


Is this similar to negation and we need to know its effect on conclusion?
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Re: QOTD: When people evade income taxes by not declaring taxable  [#permalink]

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New post 25 Apr 2018, 11:14
adkikani wrote:
GMATNinja

Quote:
The vicious cycle described above could not result unless which of the following were true?


Can I replace unless with except and complete: cross out anything that ___ (the blank here is weakens)

Or:

Do I treat unless as a necessary condition (e.g. A student can not get higher grades in studies
unless he is consistent)

Hence, I need an answer choice that must be true to weaken the conclusion.

Quote:
In other words, if the vicious cycle could still occur regardless of whether an answer choice is true, then that answer choice should be eliminated


Is this similar to negation and we need to know its effect on conclusion?

adkikani, you are on the right track with your second idea:

Quote:
Do I treat unless as a necessary condition (e.g. A student can not get higher grades in studies
unless he is consistent)

But we don't want an answer choice that weakens the conclusion. We are looking for something that MUST be true in order for the vicious cycle to occur. So if the vicious cycle can occur regardless of whether a choice is true, then we can eliminate that answer.
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QOTD: When people evade income taxes by not declaring taxable  [#permalink]

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New post 18 May 2018, 07:08
GMATNinja, can I re-frame the question "The vicious cycle described above could not result unless which of the following were true?" as

"The vicious cycle described above could not result if the following were true EXCEPT?" or indirectly

"The vicious cycle described above could result if the one of the following were true?"
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Re: QOTD: When people evade income taxes by not declaring taxable  [#permalink]

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New post 18 May 2018, 08:40
Probably E.


Premise #1: Lawmakers raise tax rates to deal with the results of tax evasion.
(Assumption to #1: Tax evasion reduces the tax revenue and hence, to collect more tax revenue, tax rates will be increased.)

Premise #2: Compliant taxpayers will have heavier tax liability burden.

Conclusion: Higher tax rates will motivate more taxpayers to evade taxes - the vicious circle.

Question - a piece of information that will make the vicious circle true. So basically we are looking for something that supports the happening of the circle.

A), This is irrelevant. Please note that the evasion in the question is "not declaring taxable income". So it doesn't matter if the taxable income is high or low, the tax-evading taxpayers simply don't report income. How to modify this option to make it a correct answer to the question? Try this: An increase in tax rates tends to encourage taxpayers to report less, or none, taxable income.

B), Authorities' attempt to collect the evaded tax revenue could be relevant. However, it's relevant only if the attempt is effective all the time. Clearly B says something otherwise. How to modify this option to make it a correct answer to the question? Try this: Some methods for detecting tax evaders, and thus recovering some tax revenue lost through evasion, have not been successful.

C), So lawmakers actually don't weight in the factor that revenue may get lost through tax evasion when they adjust the tax rates. Obviously, this is not the answer. How to modify this option to make it a correct answer to the question? Try this: When lawmakers establish income tax rates in order to generate a certain level of revenue, tax evasion is an important factor that impacts those lawmakers' decision.

D), D gives me the desire to pick it but I don't like it's dressing. So if the fines are higher, taxpayers who routinely evades tax, could stop hiding income when income tax rate is lowering. Remember, in the circle, the lawmakers are increasing tax rates. So a lowering tax rate is kind irrelevant here. But I've done many questions with very twisted logic in the argument. I am keeping D at this moment.

E), I like E. If taxpayers are all the same, then the idea of tax evasion of people who hide tax in the beginning of the circle could the idea of the very same people with the very same idea in the later stage of the circle (not sure if I am making sense here). If taxpayers are very different from each other, then some taxpayers may hide the tax and the other may not. I prefer E over D.
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Re: QOTD: When people evade income taxes by not declaring taxable  [#permalink]

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New post 19 May 2018, 08:23
seed wrote:
GMATNinja, can I re-frame the question "The vicious cycle described above could not result unless which of the following were true?" as

"The vicious cycle described above could not result if the following were true EXCEPT?" or indirectly

"The vicious cycle described above could result if the one of the following were true?"

I don't think either of these is quite right...

If you wanted to turn it into an except question, it would have to be something like, "the vicious cycle could still occur regardless of whether each of the following is true EXCEPT." But trying to re-frame questions is usually a bad idea that will just leave you twisted up and confused!

What's important here is that if the vicious cycle could still occur regardless of whether an answer choice is true, then that answer choice should be eliminated.

I hope that helps!
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Re: QOTD: When people evade income taxes by not declaring taxable  [#permalink]

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New post 19 May 2018, 12:13
GMATNinja thx for answering my question and clearing my doubt :-)
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QOTD: When people evade income taxes by not declaring taxable  [#permalink]

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New post 08 Aug 2018, 04:35
I still don't get how not allowing for tax evasion in counting revenue would stop the vicious cycle. According to me, it would just decrease the increase in tax rate to some percentage, and unless taxes are zero(or there is any significant con of evading tax), there's always a possibility of tax evasion. I don't understand how a reduced increase in tax rates is going to stop the cycle.......!!!!

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Re: QOTD: When people evade income taxes by not declaring taxable  [#permalink]

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New post 17 Aug 2018, 10:42
Blackishmamba wrote:
I still don't get how not allowing for tax evasion in counting revenue would stop the vicious cycle. According to me, it would just decrease the increase in tax rate to some percentage, and unless taxes are zero(or there is any significant con of evading tax), there's always a possibility of tax evasion. I don't understand how a reduced increase in tax rates is going to stop the cycle.......!!!!

To be clear, when we choose (C) we are doing a couple of things:

  • We're agreeing that if lawmakers allow adequately for tax evasion, they could stop the vicious cycle. NOT allowing adequately for tax evasion is what enables the vicious cycle to result and continue.
  • We're identifying what would stop the vicious cycle, not necessarily what would stop tax evasion.

(C) is the best choice because it identifies an action on the part of lawmakers (not tax evaders) that could close one end of the cycle, but that action is not actually being taken. Consequently, the vicious cycle results, just as the author concludes.

In case the language is tripping you up, the phrase "allow for" is NOT the same as "allow." It's much closer to "account for." Here, have some examples of these phrases:

  • The parents allowed their children to eat candy outside the house, so they forbade their children from eating candy at home.
  • The parents allowed for the fact that their children eat candy outside the house, so they bought less candy to keep at home.
  • The parent accounted for the fact that their children eat candy outside the house, so they bought less candy to keep at home.

In the first bullet above, we're strictly talking about permission that is given or not given. In the second two bullets, we're talking about how people plan for certain outcomes, and change their actions accordingly.

I hope this helps!
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Re: QOTD: When people evade income taxes by not declaring taxable  [#permalink]

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New post 18 Aug 2018, 00:00
Hi GMATNINJA, I am still confused with the question "The vicious cycle described above could not result unless which of the following were true?".
Isn't it asking us to find the option which helps in stopping the vicious cycle?
If so, i feel C strongly allows a vicious cycle. Can you help me out?
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Re: QOTD: When people evade income taxes by not declaring taxable  [#permalink]

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New post 19 Aug 2018, 09:35
krishnabalu wrote:
Hi GMATNINJA, I am still confused with the question "The vicious cycle described above could not result unless which of the following were true?".
Isn't it asking us to find the option which helps in stopping the vicious cycle?
If so, i feel C strongly allows a vicious cycle. Can you help me out?

krishnabalu, see if this portion of the original explanation helps:

    Let's think about what would happen if lawmakers DID allow adequately for revenue that will be lost through evasion.

    In other words, the lawmakers decide that they need some amount of tax revenue, and they set the tax rates accordingly. In doing so, they ASSUME that some people are going to evade income taxes. But that's okay because the lawmakers accounted for this in their calculations. So even though some people will evade taxes, the government is still getting all of the tax revenue that it expected to get.

    In that case, there is no need for additional tax revenue and, thus, no need to increase tax rates! That means that the vicious cycle would be avoided. The vicious cycle described above could not happen unless choice (C) were true, so (C) looks good.

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Re: QOTD: When people evade income taxes by not declaring taxable  [#permalink]

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New post 06 Sep 2018, 09:03
HI GMATNinja,

One clarification I would like to have. Are those options wrong which are not needed to be true for the vicious cycle to break? OR No matter the the wrong option is true or false, the vicious cycle doesn't break? And we are finding an option which has to be true to break the vicious cycle.
Re: QOTD: When people evade income taxes by not declaring taxable &nbs [#permalink] 06 Sep 2018, 09:03
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