There are ways to raise taxes without announcing a tax increase. And probably few are as effective (and invisible to a large part of the population) as letting inflation do the work. While public debate constantly centers on new levies, extraordinary taxes or “temporary” figures that end up becoming permanent, there exists a much more discreet mechanism that is increasing the tax pressure on millions of Spaniards with almost no political cost: the failure to deflate the IRPF.
“Workers with the same real salary as a few years ago now pay substantially more IRPF simply because their nominal salaries have risen to partially compensate for inflation”
The issue has returned to the center of the debate after various analyses showed how workers with the same real salary as a few years ago pay today substantially more IRPF simply because their nominal salaries have risen to partially offset inflation. They are not richer in real terms, but are taxed as if they were.
The phenomenon is particularly significant in Spain, where inflation accumulated since 2019 has far exceeded 20% in some basic consumption components (such as food) and where, nevertheless, the state tax system has hardly corrected the effects of that loss of purchasing power. The result is that the State collects more, even though the taxpayer has not actually improved their economic situation.
And this is not a minor issue. Because behind this dynamic lies, in addition, a transformation of the citizen-State relationship. In this sense, the tax system shifts from being perceived as a legitimate financing instrument to becoming a difficult-to-understand and even more difficult-to-fight extractive machinery.
The economic logic does not require much elaboration. The Personal Income Tax (IRPF) is a progressive tax: as the nominal wage increases, the effective rate paid by the taxpayer also increases. The problem arises when that wage growth does not reflect a real income improvement, but only an update of wages driven by inflation.
“The tax system shifts from being perceived as a legitimate financing instrument to an extractive machinery difficult to understand”
If a person earned €30,000 in 2019 and today earns €36,000, it might seem that their situation has notably improved. But if during that same period the cost of housing, food, energy or transportation has risen by similar or even greater amounts, the reality is different: their purchasing power has hardly changed or may have worsened. Yet the tax authorities treat them as if they were wealthier.
Consequently, the taxpayer moves into higher brackets and, along the way, loses deductions or bears a higher effective rate, even though in real terms they remain virtually the same. And there emerges the great incentive for the State: to collect more without the need to formally approve a tax increase.
Several countries partly correct this effect through automatic deflation of tariffs and personal allowances. Spain has done so in a very limited and fragmented way, especially at the national level. The result is that a significant portion of the recent revenue increase does not come from a richer economy, but from the combined effect of inflation and fiscal progressivity.
In recent years, the Government has repeatedly boasted record tax collection figures. And it’s true. Spain had never collected so much. However, it is worth asking how much of that increase truly stems from a more productive economy and how much from greater extraction on incomes that have barely improved. Because the underlying problem is not only how much is collected, but how it is collected.
“In some sense, it is the perfect tax rise from the perspective of political costs: barely visible to many citizens, technically complex and easily disguised”
In an economy with high inflation, wages adjusting slowly and progressive rates not corrected, the system automatically tends to increase tax pressure without explicit parliamentary reforms. It is, in a way, the perfect tax rise from the standpoint of political costs: barely visible to many citizens, technically complex and easily hidden behind headlines of rising public revenue. The problem is that its economic and social effects are highly visible.
The deterioration of family savings, the growing difficulty of accessing housing, the loss of purchasing power among the middle classes, or the increasingly widespread sense that working more does not necessarily lead to prosperity are closely linked to this dynamic.
Why fiscal pressure erodes institutional trust
Moreover, in the Spanish system, as effective tax pressure on workers and the middle classes rises steadily, the perception of dwindling public services continues to grow. It is paradoxical. The citizen feels they pay more, but do not necessarily receive more. It is precisely here that a growing critique among jurists, tax experts and international analysts arises: the problem of the Spanish tax system is—and remains—quantitative, but there is now also an institutional problem. Perverse incentives in audits, a stark disparity of resources between the Tax Administration (Hacienda) and taxpayers (especially the most vulnerable), lengthy judicial processes, the obligation to pay before appealing, and a growing sense of administrative defenselessness turn the relationship with Hacienda into a “toxic” relationship from which one cannot escape.
Paying taxes is not an issue in itself. All developed societies need to finance public services. However, the controversy surfaces when the system begins to generate fear, legal uncertainty, or a perception of arbitrariness, because that has deep economic consequences.
Investment, for example, requires stability. Entrepreneurship requires predictability. The attraction of talent and capital requires institutional trust. If the taxpayer perceives that the system operates increasingly under a logic of permanent suspicion, the resulting economic deterioration inevitably follows.
Of particular concern is the impact on highly mobile profiles: entrepreneurs, international professionals, investors or highly skilled talent. In a globalized economy, human and financial capital increasingly move to more stable and competitive environments.
On the other hand, there is an evident political incentive. In a context of high public debt, an aging population, and growing pressure on spending, the temptation to levy more revenue becomes permanent. Spain closed 2025 with public debt close to 102% of GDP and with structurally rigid spending, whose financial cost increasingly limits the fiscal margin.
“An economy does not grow indefinitely by raising the tax pressure on ever-diminishing tax bases”
In this scenario, the State needs to continually collect more to sustain growing spending structures and, consequently, the tax system gradually stops orienting toward economic efficiency and focuses primarily on maximizing revenue. An economy does not grow indefinitely by raising the tax pressure on ever-diminishing tax bases. Especially in countries with structural productivity problems like Spain.
Inflation has temporarily masked part of this problem. But the effect is not infinite. If the taxpayer perceives changing rules, sees how every nominal earnings improvement automatically translates into higher extraction, and finds that defending oneself against the Administration becomes increasingly complex and costly, institutional trust begins to erode. Restoring it, moreover, is extraordinarily difficult.
Dynamic societies tend to share a common element: relatively predictable systems, reasonable legal certainty and a perception that individual effort can translate into prosperity. When that link is broken, economic discouragement, brain drain, and institutional disaffection appear.
The inflation of recent years has acted as a gigantic silent tax increase. Millions of Spaniards pay more taxes today without having actually improved their economic situation. And the State has exploited that dynamic to raise its revenue without bearing the political cost of an explicit fiscal reform. If maintaining the same standard of living requires ever more effort while the State collects more due to that loss of purchasing power, something begins to deteriorate in the fiscal contract. If sustained over time, the problem stops being merely economic and becomes, rightly, a problem of institutional trust.
In collaboration with the “la Caixa” Foundation
