A study by the employers' association Pimec estimates that a worker earning 18,000 euros annually loses 647 euros in purchasing power each year due to the lack of income tax deflation. Spain is the country in Europe most affected by 'fiscal drag', equivalent to 0.7% of GDP.
The lack of updating income tax rates according to inflation, known as fiscal drag or cold progressivity, is particularly harsh on the lowest incomes in Spain. According to a study by the Observatori de la Pime of Pimec, a worker with an annual salary of 18,000 euros —close to the most common salary of 16,520 euros— loses 647 euros net per year due to this issue.
This amount represents a reduction of 4% of the actual net salary, a percentage that, according to the employers' association, is even higher than that suffered by higher earnings. The study was presented by the president of Pimec, Antoni Cañete, and the chair of the Commission of Economy and Taxation of the entity, Sílvia Gabarró.
The phenomenon also reflects in the labour cost for companies. Analyzing real payrolls from the hospitality, metal, and cleaning sectors, Pimec finds that for every 100 euros of additional labour cost borne by a company, only between 48 and 56 euros reach the employee's pocket. The rest, between 44 and 52 euros, goes to income tax and social contributions.
In practical terms, for a worker to receive an additional 100 euros net per year, their employer must pay between 180 and 210 euros extra. Despite gross salaries increasing by 22.1% between 2020 and 2025, above inflation, workers have lost between 2.8% and 4% of net purchasing power, according to the employers' simulations.
Cañete explained that "when you raise salaries to compensate for inflation but do not update the income tax, taxpayers end up paying more taxes and losing purchasing power." "A perversion occurs," he added. Deflation is a mechanism that adjusts tax brackets, exempt minimums, and deductions to prevent price increases from automatically raising the tax burden.
Spain ranks last in Europe in the application of this measure. Countries like Germany, Belgium, and France automatically review their income tax rates. In the European ranking, Spain occupies the second-to-last place, just ahead of Cyprus. The consequence is that the impact of fiscal drag in Spain is equivalent to 0.7% of GDP, the highest in the entire continent.
Pimec proposes that the automatic review should not only affect the income tax brackets but also the exempt minimums, reductions, and deductions, many of which have been frozen for years. One example: the ceiling for difficult-to-compensate expenses for self-employed individuals has remained fixed at 2,000 euros since 2015.
Gabarró and Cañete acknowledged that some autonomous communities have taken measures within their decision-making scope —income tax has both an autonomous and a state bracket— but advocate for a "stable review mechanism" that does not depend on the political will of each government, especially aimed at protecting low and middle incomes.
In Catalonia, the coalition formed by PSC, ERC, and Comunes has rejected twice to deflate the autonomous income tax bracket. Both PP and Junts have proposed measures in the Parlament to achieve this, but the Govern and its partners have voted against them. In 2025, the government of Salvador Illa approved a one-point reduction (from 10.5% to 9.5%) for incomes up to 33,000 euros and raised the exempt minimum, but Pimec considers that this one-off measure is insufficient.
Other communities with a lower cost of living than Catalonia, such as Aragón, Galicia, and the Canary Islands, have reviewed their autonomous income tax scale in the last three years through deflation. For SMEs and their workers, the lack of a systematic update of the tax represents a loss of competitiveness and purchasing power that, according to Pimec, should be corrected structurally.
You may also like
