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?

(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.

“When people evade income taxes by not declaring taxable income, a vicious cycle results. Tax evasion forces lawmakers to raise income tax rates GMAT critical reasoning” – is a GMAT Critical question. To answer the question, a candidate can by either finding a piece of evidence that would weaken the argument or logical flaws in the argument. GMAT critical reasoning tests the logical and analytical skills of the candidates. This topic requires candidates to find the strengths and weaknesses of the argument, or find the logical flaw in the argument. The GMAT CR section contains 10 -13 GMAT critical reasoning questions out of 36 GMAT verbal questions.

Answer: C
Explanation: GMAT critical reasoning tests the reasoning skills along with the candidate's logical and analytical thinking abilities. The candidate has to deduce the correct option by finding the logically correct argument.

Let us check the statements on which the argument depends:

1. According to option (A), persons may endeavour to improve their pretax incomes in order to offset higher tax rates. In this manner, despite the increase in tax rates, their after-tax incomes will be roughly the same. Apart from dodging their taxes, this is one method that individuals deal with rising taxation!
2. By implying that the government would be able to recoup some tax money without raising taxes, this would actually backfire against the case. If (B) were accurate, it could be possible to stop the vicious loop altogether. Because a vicious loop does not require that option (B) be true, it should be eliminated (B).
3. The tax rates are determined by the legislators after they determine that they require a certain quantity of tax income. They make the assumption that some people will do this in order to avoid paying taxes. But that's okay because the legislators took this into account when they made their estimates. Therefore, even though some people will try to avoid paying their taxes, the government still receives all of the tax money it had anticipated. In that instance, raising tax rates is not necessary because there is already enough tax income available. In other words, the vicious cycle would be stopped. If option (C) were true, the vicious loop mentioned above could not occur.
4. If tax rates were reduced, regardless of whether fines were increased, perhaps some people WOULD quit dodging taxes. Tax rates will rise if the government needs to raise more money from taxes, and the cycle will continue. According to option (D), lawmakers might be able to stop the loop by increasing fines and cutting tax rates. But even if option (D) were false, the vicious cycle could still happen. Therefore, (D) ought to be removed.
5. According to the theory, when taxes are raised, the number of persons who avoid paying their taxes will eventually rise. Choice (E) implies that practically everyone will avoid taxes after a specific tax threshold is reached. If this were the case, the term "cycle" would not exist. Instead, for every given tax rate, the majority of taxpayers will either 1) avoid taxes to some extent. 2) NOT evade taxes to any extent. In order for choice (E) to have a vicious cycle, it would have to be untrue, thus disregard it (E).

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