French Council Strikes Down 75% Tax Rate on Rich

Prime Minister Jean-Marc Ayrault quickly pledged that the government would reintroduce a revised version of the tax for next year to address the criticisms of the Constitutional Council, which ruled that the measure did not tax affected households equally.

The 75 percent rate was always a symbolic political gesture, as Mr. Hollande himself has acknowledged. It was to expire in two years and would have applied only to annual income above 1 million euros, or about $1.3 million, and so would have affected no more than a few thousand taxpayers.

Tax revenues from the measure would have reached just a few hundred million dollars, little more than a bucket of water in France’s deficit sea; the budget deficit is about $112 billion this year.

The council ruled that the tax was unfair because it would have applied unevenly to different households with the same combined income. A couple making a combined 1.5 million euros a year, for instance, would be exempt from the tax so long as both partners earned less than 1 million euros individually. If one partner earned more than 1 million euros, however, the couple would have been required to pay the 75 percent rate on their combined earnings of more than 1 million.

Mr. Hollande introduced the tax during his presidential campaign — a sharp break from his center-right rival, Nicolas Sarkozy, who had established a tax ceiling of 50 percent of earnings — to prove his leftist credentials in the face of a challenge from a candidate supported by the Communists, Jean-Luc Mélenchon.

Among the opposition on the right, politicians said the 75 percent rate was tantamount to theft, calling it “confiscatory” and insisting that it would drive investors and entrepreneurs out of the country. There have been reports and rumors of as many as 5,000 wealthy French citizens moving out of the country, though there are no official figures.

Most recently, in what has grown into a minor national scandal, it was revealed that the actor Gérard Depardieu would be taking up residence in Belgium, where there is no wealth tax and where the maximum income tax rate is 50 percent.

In France, without the 75 percent tax rate, the highest income tax rate will now be 45 percent. (With the invalidation of the 75 percent rate, French Twitter users have implored Mr. Depardieu to return to France, some facetiously, some not.) The 45 percent rate, which will apply to income above 150,000 euros, or about $198,000, is itself an increase from the previous top rate of 41 percent.

The Constitutional Council approved the increase in its ruling Saturday, along with several general elements of the government’s planned budget for next year: an increase in tax withholdings, the taxing of capital gains at the same rates as income tax and a rise in the wealth tax rates.

It invalidated a proposed 75 percent tax on complementary retirement pensions, however, calling it “confiscatory.” The council reduced the rate to 68 percent.

Mr. Hollande has committed to cutting France’s budget deficit, which stood at 4.5 percent of gross domestic product this year, to 3 percent next year. But he has emphasized tax increases rather than spending cuts. To meet the target, Parliament this month approved a spending freeze that would save about $13 billion, along with $26 billion in additional tax revenues — including those meant to come from the 75 percent rate — for the 2013 budget. But the budget was drawn up on the basis of the government’s growth estimate of 0.8 percent, a number viewed by many economists in France and elsewhere as unrealistically high.

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