France's Constitutional Council on Saturday rejected a 75 per cent upper income tax rate to be introduced in 2013 in a setback to Socialist President François Hollande's push to make the rich contribute more to cutting the public deficit.
The Council ruled that the planned 75 per cent tax on annual income above €1-million ($1.32 million Canadian) – a flagship measure of Hollande's election campaign – was unfair in the way it would be applied to different households.
Prime Minister Jean-Marc Ayrault said the government would redraft the upper tax rate proposal to answer the Council's concerns and resubmit it in a new budget law, meaning Saturday's decision could only amount to a temporary political blow.
While the tax plan was largely symbolic and would only have affected a few thousand people, it has infuriated high earners in France, prompting some such as actor Gérard Depardieu to flee abroad. The message it sent also shocked entrepreneurs and foreign investors, who accuse Mr. Hollande of being anti-business.
Finance Minister Pierre Moscovici said the rejection of the 75 per cent tax and other minor measures could cut up to €500-million in forecast tax revenues but would not hurt efforts to slash the public deficit to below a European Union ceiling of 3 per cent of economic output next year.
"The rejected measures represent 300 to 500 million euros. Our deficit-cutting path will not be affected," Mr. Moscovici told BFM television. He too said the government would resubmit a proposal to raise taxes on high incomes in 2013 and 2014.
The Council, made up of nine judges and three former presidents, is concerned the tax would hit a married couple where one partner earned above a million euros but it would not affect a couple where each earned just under a million euros.
UMP member Gilles Carrez, chairman of the National Assembly's finance commission, told BFM television, however, that the Council's so-called wise men also felt the 75 per cent tax was excessive and too much based on ideology.
Mr. Hollande shocked many by announcing his 75 per cent tax proposal out of the blue several weeks into a campaign that some felt was flagging. Left-wing voters were cheered by it but business leaders warned that talent would flee the country.
Set to be a temporary measure until France is out of economic crisis, the few hundred million euros a year the tax was set to raise is a not insignificant sum as the government strives to boost public finances in the face of stalled growth.
Mr. Hollande's 2013 budget calls for the biggest belt-tightening effort France has seen in decades and is based on a growth target of 0.8 percent, a level analysts view as over-optimistic.
Fitch Ratings this month affirmed its triple-A rating on France but said there was no room for slippage. Standard & Poor's and Moody's have both stripped Europe's No. 2 economy of its AAA badge due to concern over strained public finances and stalled growth.
The International Monetary Fund recently forecast that France will miss its 3 per cent deficit target next year and signs are growing that Paris could negotiate some leeway on the timing of that goal with its EU partners.
The INSEE national statistics institute this week scaled back its reading of a return to growth in the third quarter to 0.1 per cent from 0.2 per cent, and the government said it could review its 2013 outlook in the next few months.
Saturday's decision was in response to a motion by the opposition conservative UMP party, whose weight in fighting Mr. Hollande's policies has been reduced by a leadership crisis that has split it seven months after it lost power.
The Constitutional Council is a politically independent body that rules on whether laws, elections and referenda are constitutional.