Tax reform favours high earners despite fairness goal, study finds

Economy banksLabourtaxtax reformTop Newsworkers' rights Tax reform favours high earners despite fairness goal, study finds Central Bank Updates Rules On Loan Collateral Release And Valuation Costs Relevant News Tax reform favours high earners despite fairness goal, study finds 27 July 2026 Erhürman to meet Holguín today ahead of Guterres visit 27 July 2026 Battery storage to reach Cyprus by early 2027, minister says 27 July 2026 Theano Thiopoulou 27 July 2026 FacebookXWhatsAppEmailPrintViber Cyprus’s 2026 tax reform raises disposable income and cuts income tax overall, but the biggest gains flow to higher earners, according to a new working paper from the Central Bank of Cyprus. The reform also shrinks the number of citizens who pay income tax at all, slightly weakens the tax system’s redistributive role, and carries a significant cost to public finances. The findings come from “Assessing the Distributional and Fiscal Impacts of Cyprus’s Personal Income Tax Reform,” by Aris Avgousti, Charalambos Michael and Georgiana Fotiadou, published in the central bank’s working paper series. Tax policy is the government’s responsibility rather than the central bank’s, the paper notes, but tax changes still ripple through the economy by altering how much disposable income households have. When different income groups gain more money, it changes how they spend, save or pay down debt, which in turn affects demand, the way monetary policy takes hold, and, in some cases, financial stability, particularly where household debt levels are high. Despite the overall rise in disposable income, the study concludes the reform does little to advance its stated goal of a fairer distribution of national income, since lower income groups see almost no benefit. The authors built their analysis using microsimulations from the EU’s EUROMOD model, drawing on confidential data from the EU-SILC survey and the Household Budget Survey. They examined three main measures: the restructuring of tax brackets, new tax exemptions for dependent children and students, and a tax deduction for mortgage interest or rent on a first home. A proposed deduction for “green” investments was left out of the analysis due to a lack of reliable data. The total fiscal cost of the measures comes to roughly €240 million a year, the study estimates, a figure close to the government’s own official projections. While manageable under Cyprus’s current budget surpluses, the authors point out that every tax cut carries an opportunity cost: the same money could instead have gone toward public investment in education, innovation, infrastructure or social protection. The paper stops short of modelling the reform’s full macroeconomic impact, but under certain assumptions, it expects the rise in disposable income to boost private consumption, generating a modest uptick in VAT and other consumption tax revenue. The overall effect on GDP is judged positive but limited, since much of that private spending goes on imported goods, which dilutes its knock-on impact on the Cypriot economy. One of the study’s key findings concerns who actually pays tax. Tax Department data from 2022 shows 43% of taxpayers declared taxable income below the then tax-free threshold of €19,500. In other words, almost one in two taxpayers were already paying no income tax, meaning the rise in the tax-free threshold to €22,000 barely changes their tax burden at all. This is why lower income groups see next to no direct benefit from the reform. Beyond assessing the reform itself, the paper raises a broader question: how should the fiscal space created by Cyprus’s continued budget surpluses be used? The authors argue that some of these resources could instead fund productive public investment, better public services, and the green and digital transition, strengthening the country’s long-term growth prospects. They also note that the new tax deductions, based on total household income, shift the underlying philosophy of the tax system. While this improves targeting of who benefits, it also adds complexity, since it requires checking total household income and supporting documentation. International research suggests similar outcomes can often be achieved more transparently through direct social transfers, which are considered easier to administer and more effective at reaching households that genuinely need support. The reform also cuts the number of people who will pay income tax at all. Simulations show the number of taxpayers with a positive tax liability falling by around 22%. That narrows the tax base and could deepen the state’s reliance on a relatively small share of high-earning taxpayers. Based on 2024 income data, the number of taxpayers liable to pay income tax falls from 245,199 to 190,631, a drop of 54,568 people, or 22.3%. Adjusted for expected 2026 incomes, the equivalent drop is estimated at 21.6%. The restructuring of tax brackets sits at the centre of the reform. The tax-free threshold rises from €19,500 to €22,000, while every tax bracket threshold moves upward. The most significant change affects the fourth bracket, which widens from a range of €36,301–60,000 to €42,001–72,000. The government’s original proposal called for an even wider range, up to €80,000, but this was scaled back during debate in parliament. Even so, the authors argue that a smaller expansion of this bracket would have limited tax relief for high earners and significantly cut the fiscal cost. Higher earners, meanwhile, gain considerably more than everyone else. The average annual rise in disposable income comes to just €5 for the lowest income decile, compared with €1,057 for the highest. Even measured as a share of disposable income, the largest increases go to the top: the ninth decile sees an average rise of 2.9%, and the highest decile 2%. Households around the middle of the income distribution, by contrast, receive comparatively smaller tax relief. 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