SACE Stage 2 Economics Practice Exam

The scenario that would likely result in a higher marginal rate of taxation (MRT) is one in which a marginal increase in income leads to a significant tax increase. This occurs because as income rises, the tax system's structure may impose higher tax rates on higher income brackets. If the increase in income pushes the individual into a higher tax bracket, the tax payable on that marginal increase could be greater than what it was before the increase.

In essence, the MRT reflects how much additional tax is paid on each additional dollar of income. Hence, a significant tax increase in response to a marginal income rise indicates that the marginal tax rate is substantial. Essentially, this scenario depicts a progressive taxation system where higher incomes incur higher tax rates, thus amplifying the marginal rate for any recent increase in earnings.

In contrast, other scenarios present more stable or linear outcomes regarding taxable income and tax liabilities, keeping the marginal rate unchanged or lower. For example, marginal increases in income without changes in tax payable or proportionate tax increases would not significantly affect the MRT, as they do not result in a higher rate levied on that additional income.