French gov't may water down 75-percent tax after setback

Hollande pledged to press ahead with a redrafted tax on the wealthy next year after the Constitutional Council's decision on Saturday to strike down the emblematic rate on income over 1 million euros (US$1.32 million).

But the Socialist president, who won office in May, avoided referring specifically to the 75-percent rate which has made some of France's wealthy, including film star Gerard Depardieu, announce they will move abroad.

“We will still ask more of those who have the most,” Hollande said in a televised New Year's address on Monday, without providing details of the new proposal.

Among bankers at least, expectations are growing that the tax may look very different when the government comes back with a revised plan even if the original had strong public backing.

“I suspect this tax will be shelved,” said Philippe Gudin, a France economist for Barclays and a former Treasury official.

“For the (low amount of) revenue it would raise, the outcry it has provoked and the damage it has done to France's image, it would be more sensible if it were quietly buried.”

The Council said the tax was unfair as it would hit married couples where only one partner earned above a million euros but would not affect couples where each earned just under a million.

Opinion polls show that six in 10 French people back the tax. But while it would have affected only 2,000-3,000 people and raised just a few hundred million euros a year, criticism from the business sector and high earners has been incessant.

Hollande finds himself stuck between trying to appease investors who see him as anti-business and showing voters he remains serious about making the rich cough up more taxes.

Political analyst Olivier Duhamel said the government could accept the Council's ruling by making the tax applicable to households, rather than individuals, and possibly raising the income threshold to 2 million euros.

Alternatively, it could use the rejection as justification for ditching the whole idea. “In politics, when things get difficult, you are stuck with unpleasant choices,” Duhamel said.

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