The law approved with the support of all partners in the country's three-party ruling coalition shuffles and simplifies tax scales, reforms family benefits, increases taxation of deposit interest and expands the tax base to include groups such as low-earning farmers.
It brings in a new top tax rate of 42 percent for Greeks earning more than (EURO)42,000 ($56,000) a year. The previous top rate was 45 percent for incomes above (EURO)100,000 ($132,000).
The conservative-led government argues that the new law will reduce the burden on salary-earners and pensioners making less than (EURO)25,000 ($33,000) a year.
"We are not in favor of taxes," Deputy Finance Minister Giorgos Mavraganis said. "But in the current situation we must lead the country out of its impasse. Once we achieve stability we will proceed to cut taxes and simplify the system."
Greece has been kept solvent by huge rescue loans from its European Union partners and the International Monetary Fund since May 2010, shortly after its finances imploded leaving the country unable to borrow from international markets. In exchange for the two successive bailouts, Athens implemented harsh austerity measures aimed to reduce runaway budget deficits while bringing its debt mountain to manageable levels.
Following months of negotiations with the EU and IMF on new spending cuts and reforms, last month Greece received (EURO)34.3 billion ($45.5 billion) in frozen loans, and is set to get another (EURO)15 billion ($19.9 billion) in coming months. The tax law was one of the country's key commitments to secure the money, without which it would have been unable to pay its bills.
Finance Minister Yannis Stournaras told lawmakers just ahead of the ballot that they had no option but to pass the law.
"Otherwise, we would have had to have saved that (EURO)2.3 billion through salary and pension cuts," he said. "But we are making the savings in a socially just fashion."
Critics accused the government of heaping unbearable burdens on ordinary Greeks while giving the rich an easy ride, with the main opposition Radical Left Coalition saying austerity has "demolished the country's middle classes."
"I'm not a miser, I'm just honoring our promises to ensure we can continue receiving the (loans)," Stournaras said.