Prime Minister Mariano Rajoy's conservative government said the proposed tax cuts, agreed by the cabinet on Friday, would raise gross domestic product by 0.55 percent over the next two years — 2015 and 2016.
"We're doing it to stimulate growth, for job creation and for the gains in corporate competitiveness," Budget Minister Cristobal Montoro told a news conference on the proposed tax cut legislation, which is being opened to public consultation before a final version is presented to parliament.
The government says it plans to cut the lowest income tax rate on people earning less than €12,450 ($16,900) a year from 24.75 percent in 2014 to 20 percent in 2015 and 19 percent in 2016.
The top rate for those earning €60,000 or more a year would be cut from 52 percent in 2014 to 47 percent in 2015 and 45 percent in 2016.
The population would enjoy an average income tax cut of 8.06 percent next year compared to 2014, government figures showed.
The corporate tax rate, meanwhile, would be trimmed from 30 percent to 28 percent next year and 25 percent in 2016.
– 'Helps election chances' –
"The tax cuts should support the re-election chances of the Rajoy government, which had adopted one of the toughest labour market reforms in Europe in 2012 and has brought the country's troubled financial sector under much better control," said a report by economists Holger Schmieding and Christian Schulz of the German private bank Berenberg.
"That is positive for Spain and Europe. Jointly with Germany, Spain is already leading the eurozone's gradual economic recovery. The tax cuts next year could boost growth further," they said.
Spain's economy, the fourth largest in the eurozone, emerged in mid-2013 from a double-dip recession sparked by a 2008 property crash.
The country reported economic growth of 0.4 percent in the first quarter of this year, but economic activity has been insufficient to significantly dent the 26-percent unemployment rate.
"We will not increase VAT," Montoro said, despite advice from the IMF and European Commission, which have advised Spain to gradually increase income from the 21-percent sales tax by withdrawing the reduced rates applied to a range of items including food, books, hotels and restaurants.
The budget minister said income from sales tax was already rising in line with increasing economic activity.
Spain's government forecasts economic growth of 1.2 percent in 2014 and 1.8 percent in 2015.
At the same time, the government says it aims to lower the public deficit to the equivalent of 5.5 percent of GDP this year, on the way to finally respecting an EU-agreed deficit ceiling of 3.0 percent of GDP in 2017.