Cristóbal Montoro, Spain's budget minister, told reporters Friday, "The time has come to lower taxes for everybody."
But even as Spain's economy shows signs of improvement, its unemployment rate remains stubbornly close to its record level, at 26 percent. Rajoy also faces political challenges, including a corruption investigation into kickbacks paid to senior politicians in his Popular Party.
The plan is likely to come under close scrutiny from the European Commission, reflecting concern that reducing taxes could jeopardize Madrid's pledge to cut its deficit to 3 percent of gross domestic product by 2016 from an expected 5.6 percent in 2014.
On Friday, the government also rejected raising Spain's value-added tax despite suggestions from Brussels that Spain should consider increasing consumption levies and other indirect taxes to help meet deficit goals.
Instead, Montoro forecast that cutting taxes would increase both investment and consumption, helping to increase Spain's gross domestic product and keeping the country on track to meet its deficit targets.
The package of tax cuts had been expected since Rajoy described some minor fiscal concessions during his state of the nation address to Parliament in February, when he promised citizens to "soften demands now that the sacrifices that Spanish society has made are yielding fruit."
The tax plan underlines the extent to which Spain's economic situation has improved significantly from two years ago, when Rajoy was struggling to contain a recession and banking crisis that led his government to negotiate a European bailout to keep afloat Bankia and other banks being crippled by mortgage loan defaults.