First thing to do here is define the cycle
People evade taxes---->Government raises the tax rates ---->Taxes become heavier, so more people evade taxes---->Government raises the tax rates---->Taxes become heavier....etc...
The question wants to know why the continuous cycle occurs
A) Incorrect. This relly has nothing to do with the cycle as it does not even state if this is reportble pretax income or not. If we assume its all reported it actually would be reason for the cycle to not occur.
B) Incorrect. B is out of scope. It is presents an alternative to raising taxes, but is not the reason why the cycle does or does not occur. it is independant of the cycle.
C) Correct. If the government took into account that people will not pay taxes they would never have the revenue shortage that forces the tax increase. For example lets say they know that only 90% of the population will pay taxes and 10% will evade it. If the government budgets 100K in revenue based on 100% tax payment they will run short and the cycle ensues. If at first they simply budget 90K they will always run on target and the cycle stops because taxes will not be raised. The same would hold true on the tax rate change.
D) Incorrect. This is something that again is proposing alternates. If rates were lowered and fines increased maybe tax participation would increase. If it did then why not increase fines and end the cycle?
E) Incorrect. The original cycle has nothing to do with tax brackets.
