Final answer:
The correct option is B. A taxpayer may defer income recognition when expecting a decrease in tax rates, future rise in income leading to higher tax brackets, or to manage cash flow aligned with a rise in wealth. Arthur Laffer suggested that lower tax rates could stimulate economic activity, increasing tax revenue through a broader tax base.
Step-by-step explanation:
A taxpayer might want to defer the recognition of income under certain circumstances. One scenario is when tax rates are expected to decrease in the future, deferring income into a later year could result in paying taxes at a lower rate. Additionally, if the taxpayer expects a rise in future expected income that might push them into a higher tax bracket, it could be beneficial to defer income to maintain a lower tax rate. Also, deferring income might align with a desire to save less currently and spend more in the future when they anticipate a rise in wealth or a fall in interest rates, thus managing cash flow better.
Economist Arthur Laffer posited that sometimes income tax revenue can increase when tax rates decrease. This could occur because the incentive to earn more might lead to an increase in economic activity and thus a broader tax base. This can happen when an individual's desire to work more outweighs the impact of the reduction in taxes, resulting in an overall increase of income being taxed, albeit at a lower rate.