French verdict

January 02, 2013 - 1:07:16 am

President Francois Hollande must rethink his punishing 75 percent tax on the super-rich.

The verdict of the French constitutional court on December 29 that President Francois Hollande’s 75 percent millionaire tax wasn’t acceptable has a dealt a severe blow to the president. The ruling shows the limits of his ability to tap high earners to boost the economy, and secondly, it comes as a major relief to the wealthy in France who have resented the high tax, a few of whom have even migrated to other European countries to escape the tax.

The tax was one of Hollande’s campaign promises and he said he was left with few options to revive the economy, facing the difficult task of cutting the public deficit to three percent of gross domestic product this year from a projected 4.5 percent last year. But the decision was controversial and became a focal point of discontent among entrepreneurs and other wealth creators. But it’s not only the rich and market experts who had opposed a tax of 75 percent on the super-rich, even others were surprised at the move. Seventy-five percent is considered too punishing and confiscatory, and will do more harm to the economy than good. Hollande could have settled for a smaller percentage, a more acceptable slab. Anyway, the court ruling has injected some sanity into the whole process.

The court said that 75 percent band on incomes of more than one million wasn’t acceptable because it applied to individuals, when French income taxes are generally based on household revenue. As a result, two households with the same total income could end up paying different rates depending on how earnings are divided among their members, counter to the rule of equal tax treatment. The court’s specific objection was that Hollande’s plan would have added extra levies of 18 percent on individuals’ incomes of more than one million euros, while the calculation of income taxes and a four percent exceptional contribution for high earners would have been based on household income.

However, actor Gerard Depardieu, France’s highest-profile tax exile, has said the ruling will not make much difference. Depardieu, who is moving to the Belgian community of Nechin, just across the border, has been engaged in a war of words with the government over his decision. Depardieu wrote that he is leaving “because you consider that success, creativity, talent, anything different, are grounds for sanction.” Bernard Arnault, chief executive officer of LVMH Moet Hennessy Louis Vuitton, had filed an application for Belgian nationality in September, which had invited fierce criticism from the president and his supporters.

Speaking to the nation on New Year’s eve, the president vowed to tax the rich. But he is likely to water down the rate. There is nothing wrong with taxing the rich, as long as it’s not considered punishing.