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.

Why C?

because if they do not allow adequately for revernue that will be lost through evasion, they subsquently increase the tax rate, make it a circular problem. If they allow the loss, they won't increase the tax rate.

Hope this helps.

Miles

For tax evasion to force a raise in income tax rates it must be true that tax evasion causes actual tax revenues to fall short of revenue needs. This is the situation that choice C describes; choice C is therefore the best answer.

None of the other choices states a requirement for the vicious cycle to result. Increasing in pretax incomes (income A) would tend to work against perpetuation of the cycle. Success at catching tax evaders (choice B) should likewise have an inhibiting effect. Choice D describes how problems in breaking existing habits of tax evasion might be overcome. Choice E essentially denies that raising the tax rate in response to some tax evasion could cause additional tax-payers to evade taxes.