Income tax to fall 12.5% over two years

The government has announced income tax relief for Spaniards, who can expect it to kick in next year.

Under the tax reform presented by the Popular Party (PP) administration on Friday, income tax on wages will go down an average 12.5 percent over the course of two years, said Deputy Prime Minister Soraya Sáenz de Santamaría.

Santamaría added that for 62 percent of taxpayers – those earning less than €24,000 a year – the income tax rebate will be an average 23.5 percent in 2016.

The deputy prime minister also denied there would be any further hikes to value-added tax (VAT), save those on certain sanitary products to comply with orders from Brussels.

The time has come for lower taxes for everybody” Cristóbal Montoro, finance minister

A new tax category is being created for large families and those who have dependents in their care, and tax on savings will go down to 2011 levels for amounts under €50,000, Santamaría continued.

“The time has come for lower taxes for everybody,” said Finance Minister Cristóbal Montoro, adding that the number of tax brackets was being reduced from seven to five. The lowest rate will drop from 24 percent to 20 percent in 2015 and to 19 percent in 2016. The highest tax rate will shrink to 45 percent in 2016.

Taxpayers will feel the difference from January 2015, just before the May local and regional elections, with general elections due in November.

The PP hopes to make voters forget that the first thing it did upon reaching power in late 2011 was to raise taxes. During Mariano Rajoy’s first two years in office, there have been around 50 tax hikes at all levels.

The reforms are a far cry from the radical changes promised by the government last year, when it described the project as a springboard for the economic recovery. The new framework will focus on indirect taxes (VAT and others) while taking pressure off direct ones such as income tax and corporate tax.

Many international organizations, including the European Commission, the International Monetary Fund and the Organization for Economic Co-operation and Development, had asked Spain for such a move.

But for now, Montoro is resisting Brussels’ request to raise VAT again to compensate for the lower income taxes. The European executive is trying to get Spain to meet its deficit targets and feels that this new tax rebate could endanger that goal.

Madrid claims that the economy is recovering and that tax revenues are doing better than expected, leaving the government with some leeway.

Some analysts note that the government is keeping unpopular measures, such as reclassifying products that carry VAT or significantly raising the property tax, until after elections are over.