Rajoy Unveils Tax Cuts to Strengthen Recovery in Election Run-Up

Spain will lower income and corporate taxes next year in an overhaul that aims to sustain growth in the euro region’s fourth-largest economy.

Income tax will decline by 13 percent on average with those earning less than 24,000 euros ($33,000) seeing their tax bills fall by 23 percent by 2016, Deputy Prime Minister Soraya Saenz de Santamaria said. The main corporate tax rate will drop to 28 percent next year and then 25 percent. She ruled out raising sales tax beyond a narrow range of health products where the European Commission has ordered a change.

“After Spanish society’s efforts during the crisis, this is aimed not just at rewarding those sacrifices but also invigorating growth and job creation,” Saenz said during a news conference in Madrid today after the weekly Cabinet meeting.

The European Commission and the International Monetary Fund have called on Prime Minister Mariano Rajoy to increase indirect taxes and close fiscal loopholes to boost growth and revenue as the nation recovers from a six-year economic slump. With elections due in 2015, Rajoy’s government is seeking to ease the burden of the deepest cuts in Spain’s democratic history.

The plan will add 0.5 percentage points a year to Spain’s economic growth, Budget Minister Cristobal Montoro said, sitting alongside the deputy prime minister.

“The tax reform will help companies to increase their size and competitiveness,” Montoro said.

The plan also includes a tax incentive to encourage companies to increase their reserves, Montoro said. Spain’s corporate tax rates compare with 23 percent in neighboring Portugal and 12.5 percent in Ireland, the country that’s recovering fastest from Europe’s sovereign debt crisis.

The top rate of income-tax rate will be reduced to 47 percent from 52 percent while the lowest rate will decrease to 19 percent from 24 percent by 2016, the second year of the program, Montoro said. Tax breaks for families will be increased, he said.

While the country emerged last year from its second recession since 2008, the jobless rate of 25 percent remains the second-highest in the European Union. The government’s debt load is approaching 100 percent of gross domestic product, and its budget deficit was the EU’s fourth-largest in 2013.

The Bank of Spain last week echoed the recommendations from the IMF and the Commission. The tax changes are necessary to extend the recovery, the central banks aid, endorsing proposals made by a panel of experts mandated by the government, such as reducing social-security contributions and direct taxes while increasing value-added tax to make up the shortfall.

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