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.