In its 2024–2025 Monetary Policy Report, the Bank of Greece calls for comprehensive reforms to the country’s system of direct taxation, highlighting the critical role tax policy can play in maintaining fiscal stability amid economic pressures. Central to its recommendations is the strengthening of progressivity within the tax structure — the principle that higher earners should contribute proportionally more — which the Bank views as essential for both curbing fiscal drag and ensuring a more equitable tax system.
Fiscal drag, a phenomenon where inflation and nominal wage increases push taxpayers into higher tax brackets without a corresponding rise in real income, is identified as a significant threat to public finances and income distribution. The Bank emphasizes that failing to adjust tax brackets in line with inflation can lead to a hidden tax burden, particularly on middle-income earners. A nominal salary increase of just 3%, for instance, could move a taxpayer into a higher bracket, increasing their tax liability without improving their actual purchasing power.
The Bank warns that such dynamics undermine the effectiveness and fairness of the tax system, especially in a context of limited fiscal space. It urges Greek policymakers to quantify the effects of fiscal drag and incorporate them into medium-term fiscal planning. Doing so, the Bank argues, would lead to more accurate budget forecasting and allow for more precisely targeted policy measures.
Progressivity in taxation is also presented as a tool for economic stabilization. During inflationary periods, a more progressive tax system can dampen excessive demand by absorbing part of the nominal income gains, thus helping to contain inflationary pressures. In contrast, during economic downturns, lower-income groups—who typically face lighter tax burdens—are better positioned to maintain consumption, which supports overall demand and contributes to recovery.
The Bank also expresses support for recent reforms in the taxation of self-employed professionals in Greece, particularly the introduction of a minimum presumptive income threshold. This move is seen as a step toward reducing widespread tax evasion in this segment of the economy. According to the report, the measure improves transparency, broadens the tax base, and restores a sense of fairness, as previously underreported earnings often resulted in disproportionately low contributions from self-employed individuals.
Finally, the report stresses the importance of fostering productive investment through targeted tax incentives. The Bank recommends offering fiscal benefits to startups and businesses investing in research and development, digital innovation, and green technologies. Such measures, it argues, are not only vital for stimulating economic activity in the short term but could also deliver long-term structural benefits, enhancing Greece’s competitiveness and economic resilience on the international stage.
