When people evade income taxes by not declaring taxable income, a vici

Question

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?

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.

GMATNinja · Accepted Answer

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:

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).

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).

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.

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.

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.

eastcoaster9 · Answer

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 them to evade taxes. 
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.

greenoak · Answer

More variety

: I’d pick C. 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.

PrashantPonde · Answer

Question:  The vicious cycle described above could not result unless which of the following were true?
The question is twisted in interesting way with double negations. Note the use of "could not" along with  "Unless"="IF..NOT" or "Except-IF" .

You can simplify the question to:
 Reworded Question:  The vicious cycle described above could result if which of the following were true?

Hence you need to eliminate the choices which "breaks" the vicious cycle and choose the choice that does not    .

(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 the correct answer choice! This situation will ensure that the vicious cycle is continued.

Hence choice(C) is the answer.

Soumyasrinivas · Answer

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?

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

mikemcgarry · Answer

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 :-)

EMPOWERgmatRichC · Answer

Hi All,

This CR prompt describes a circular/repeating cycle that occurs when people evade paying taxes…

1) People avoid paying income taxes 
2) Lawmakers are FORCED to raise income taxes 
3) The tax burden becomes worse for people who actually pay tax, so….we end up back at Step 1….

1) More people avoid paying income taxes 
Etc.

We're essentially asked to define WHY this cycle happens. When reading the prompt, I focused on the word "forced" - why EXACTLY would lawmakers be FORCED to raise taxes if some people didn't pay??? There must be some "need" for that money; when the lawmakers don't get what they need, then they have to raise taxes to try to get what they need. We're looking for an answer that addresses this issue (and likely points out something faulty in the lawmakers plan that causes the problem to occur).

Answer  C gives us exactly what we're looking for. The root "cause" of the cycle and the reason why it occurs.

GMAT assassins aren't born, they're made, 
Rich

LogicGuru1 · Answer

The answer is C

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?

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.

adkikani · Answer

GMATNinja 
 VeritasPrepKarishma

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.

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

GMATNinja · Answer

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

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.

seed · Answer

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?"

GMATNinja · Answer

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!

Blackishmamba · Answer

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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GMATNinja · Answer

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!

krishnabalu · Answer

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?

GMATNinjaTwo · Answer

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.

akshaykotha · Answer

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.

GMATNinja · Answer

akshaykotha , if the vicious cycle could still occur  regardless  of whether an answer choice is true or false, then that answer choice should be eliminated.

The correct answer is something that has to be true in order for the vicious cycle to  occur , not something that has to be true in order to  break  the vicious cycle.

I hope that helps!

GMATGuruNY · Answer

Vicious cycle:
lawmakers establish tax rates --> people evade taxes --> to compensate, lawmakers raise tax rates --> people evade taxes again --> to compensate, lawmakers raise tax rates again --> people evade taxes again --> to compensate, lawmakers raise taxes again --> ad infinitum

Apply the NEGATION TEST. 
When the correct answer is negated, the vicious cycle will not occur.
C, negated:
 When lawmakers establish income tax rates in order to generate a certain level of revenue, they allow adequately for revenue that will be lost through evasion. 
This negation implies the following scenario:
To meet its needs, the government must collect $100 million in income taxes.
When they establish tax rates, lawmakers anticipate that $20 million will be lost to tax evasion, so they establish a tax rate that will yield $120 million.
Thus, when people evade paying $20 million in taxes, the government still collects the $100 million it needs.
Since the government collects all the money it needs, there is no need to raise tax rates.
The result:
NO VICIOUS CYCLE.

C

When people evade income taxes by not declaring taxable income, a vici

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When people evade income taxes by not declaring taxable income, a vici

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