SACE Stage 2 Economics Practice Exam 2025 - Free Economics Practice Questions and Study Guide

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If a taxpayer’s income rises but their tax does not increase proportionately, what can be inferred about their MRT?

The MRT is lower than their ART

When a taxpayer's income increases and their tax does not rise proportionately, it indicates a situation where the marginal rate of taxation (MRT) is lower than the average rate of taxation (ART). The average rate of taxation is calculated as the total tax paid divided by the total income. As income increases, if the tax payment increases at a slower rate than income, the MRT—which represents the tax rate on the next dollar of income—would decrease relative to the ART.

In this circumstance, the taxpayer is experiencing a scenario where additional income is taxed at a lower rate compared to the overall average tax rate they are paying, which causes the MRT to be lower than the ART. This could happen in a progressive tax system where certain portions of income are subjected to lower tax rates, thus leading to a decrease in the marginal tax rate as income rises.

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The MRT is the same as their ART

The MRT must increase

The MRT cannot be determined

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