During their return drive back to Berlin in Max's limousine, the baron continues to discuss his proposed exotic trip to Africa with them. They stop at a German outdoor beer garden cafe along the way, and while Sally takes a nap in the car, Brian and Max sit at a table together. They are expressing with a subtle set of clues that they now have mutual sexual desire for each other. (Brian possesses and uses the gold cigarette case, Max's gift that he had refused earlier.) Brian has warmed up to Max and is now less cautious.

They watch an adolescent boy inspire the crowd to sing a rousing song about the future. It is a chilling scene - a seemingly innocent pastoral ode to Germany, sung by a lone, fresh-faced, tenor-voiced blonde youth. The tune, "Tomorrow Belongs to Me," is slowly turned into a Nazi rally. As the boy sings with increasing fervor, it is revealed as the camera pans downward that he is a member of the Hitler youth, wearing a brown uniform and his arm is wrapped with a Nazi swastika armband. The patrons (except for one disgusted elderly man who sits glumly and quietly in protest) join in the triumphant Nazi anthem, and some stand, as he gives a Sieg Heil salute:

The sun on the meadow Is summery warm The stag in the forest runs free
But gather together to greet the storm Tomorrow belongs to me
The branch of the linden is leafy and green The Rhine gives its gold to the sea
But somewhere a glory awaits unseen Tomorrow belongs to me
The babe in his cradle is closing his eyes The blossom embraces the bee
'But soon,' says a whisper, 'arise, arise Tomorrow belongs to me'
Oh, Fatherland, Fatherland, show us the sign
Your children have waited to see The morning will come
When the world is mine Tomorrow belongs to me

Brian makes a pointed side rhetorical comment to Max, who is politically unaware of the changing times: "Do you still think you can control them?" They drive away in the baron's luxurious car from the gathering of glazed-eyed Germans hopeful for their future, unaware of the reality of the situation - that the Weimar Republic is declining in the face of Nazism.

Meanwhile, Natalia's and Fritz' relationship is growing more complicated. She tells him: "The situation is impossible. We must not see each other anymore." She admits that she now believes that he isn't a fortune-hunter, but an honest man who truly loves her. He has proposed marriage, but she refuses, due to the current political instability in Germany (and brutality of the Nazis): "I'm a Jew. You are not."

At the same time, Sally is excitedly packing for Max's trip to Africa - at least a two month journey. Unaware that Max is married, Sally expects a possible marriage proposal, making her the next Baroness. To calm Brian, she promises: "I wouldn't dream of accepting him." Brian cautions that she is self-deluded and absurd ("Aren't you ever gonna stop deluding yourself?..Behaving like some ludicrous, little, underage femme fatale. You're about as 'fatale' as an after-dinner mint"). During an argumentative quarrel, Sally accuses Brian of being extremely jealous of Max ("he's everything that you're not") - "rich...suave...and divinely sexy."

Sally: He really appreciates a woman.
Brian: (exasperated) Oh, screw Maximilian!
Sally: I do.
Brian: (after a pained laugh, pause and smile) So do I.
Sally: You two bastards!
Brian: Two. Two?! Shouldn't that be three?!

Brian's bi-sexuality is revealed, and both of them are having shared sexual relations. Max enjoys sexual dalliances with both Sally and Brian, and they have both betrayed each other. She begins to suspect that the baron has no intention of marrying her.

In a furious rage, Brian storms out of Sally's room. Appalled by the inexorable rise of Nazism, he provokes a fierce fistfight with two Nazis handing out leaflets ("pure crap") on the street, after which he finds himself badly bruised and beaten, and being cared for by Sally. At the last minute, Max has abruptly changed his plans to take the couple to Africa, due to urgent family matters that are taking him to Argentina instead. He also leaves the two of them 300 marks ("Some gold-diggers, aren't we?"). Sally apologizes to Brian and they are reconciled.

Shortly later, Sally's and Brian's relationship is further strained when she becomes pregnant ("Goddammit, I'm gonna have a baby"), and she doesn't know who the father is. When she proposes to have a costly, illegal abortion operation (paid for with her fur coat), Brian surprisingly offers to marry Sally and take her back to England with him (she would have to give up her dream of becoming an actress). They drunkenly toast and celebrate their impending nuptials and plans for the future as a family - Sally is briefly deluded by the thought of having a future with Brian.

Natalia's family is beginning to experience anti-Semitic vandalism - the murder of their dog on their front steps by young boys, and graffiti ("Juden") smeared on the wall of their house. Fritz reluctantly realizes that the only way he can be with Natalia is by telling her the truth - that he is in fact Jewish himself, although he cowardly fears repercussions from employers, Nazis, and Natalia herself for lying. The situation is paralleled with the MC's song in the Cabaret: "If You Could See Her" - a satirical view of the way the Nazi propagandistic machine depicts the Jewish race as sub-human. In the number, the MC dances with a "Jewish" beast (a girl in a gorilla costume) - with a ring in her nose:

I know what you're thinking, You wonder why I chose her
Out of all the ladies in the world, It's just a first impression
What good's a first impression, If you knew her like I do,
It would change your point of view.

If you could see her through my eyes, You wouldn't wonder at all.
If you could see her through my eyes, I guarantee you would fall - like I did
When we're in public together, I hear society moan,
But if they could see her through my eyes, Maybe they'd leave us alone.

How can I speak of her virtues? I don't know where to begin.
She's clever, she's smart, she reads music, She doesn't smoke or drink gin - like I do
Yet when we're walking together, They sneer if I'm holding her hand
But if they could see her through my eyes, Maybe they'd all understand

After Fritz' confession that he is a Jew, Natalia agrees to marry him. The couple wed in an orthodox Jewish ceremony.

In contrast, Brian and Sally's relationship is strained with talk of the expected baby. He has become uncommunicative, distant, and estranged, causing Sally to become depressed as she remembers back (in a quick montage) to earlier days of singlehood excitement. Behind his back, Sally has an abortion (indicated by her missing fur coat). When Brian asks why, she answers: "One of my whims." Angered, he criticizes her dreams of stardom, and her strategy of bedding down with producers or directors in order to get an acting role. When he calms down and insists on knowing, Sally truthfully explains why she had the abortion when she acknowledges her selfish and inconsiderate ways - her aspiration remains to pursue her dreams to be an actress rather than a mother:

I'm self-centered, inconsiderate, and what was the third adjective? Oh, yes. And I have this infantile fantasy that one day, I'll amount to something as an actress. A dinky little cottage in Cambridge? A playpen in the bedroom, diapers on the towel rack. How soon would it be before we started hating each other? How soon would it be before I started dashing out and disgracing myself at some nearest pub. And how soon would it be before...?

She hesitates to explain that eventually, he would be unhappy with her because of his preference for men. She accompanies him to the train station as they bid each other a strained, tearful farewell and goodbye and he returns to England alone. They shake hands - and she waves her green fingernails at him when she is turned and walking away. She decides to complacently remain in Germany - a country descending into chaos and tyranny, although the marginalized place where she finds success on stage.

Sally selfishly continues her life as a self-deluded star singer on the narrow stage domain of the cabaret club. She is backstage at the Kit Kat Club when the MC introduces the "international sensation" for a thrilling rendition of the sardonic title song, "Cabaret." Her message is to laugh, be merry, sing, and live forever in the moment, open to all possibilities - with no concern that the twisted external environment is on the verge of deadly authoritarianism:

What good is sitting alone in your room?
Come hear the music play,
Life is a Cabaret, old chum
Come to the Cabaret.

Put down the knitting, the book and the broom
It's time for a holiday
Life is a Cabaret, old chum
Come to the cabaret.

Come taste the wine, come hear the band
Come blow your horn, Start celebrating
Right this way Your table's waiting
What good's permitting some prophet of doom
To wipe every smile away
Life is a Cabaret, old chum
So, come to the Cabaret!...

Start by admitting, from cradle to tomb
It isn't that long a stay
Life is a Cabaret, old chum
It's only a Cabaret, old chum
And I love a Cabaret!

In the final reprise of "Willkommen", the MC grinningly (and desperately) again asks for the patrons to keep the laughter and merriment going:

Where are your troubles now?
Forgotten? I told you so!
We have no troubles here
Here, life is beautiful.
The girls are beautiful.
Even the orchestra is beautiful.

He ends the song with: "Auf wiedersehen! A bientot..." Afterwards, he bows, disappears behind a curtain, and then there's a slow camera pan to the right (with a long snare drum roll and cymbal crash). It finds a pair of menacing Nazi swastikas (worn by two audience members) reflected on the twisted, mirrored mylar-silver wall - a distorted foreshadowing of the coming evil.