Hollande Millionaire Tax Shot Down By French Courts… Not That It Matters

 @JaceyFortin on December 29 2012 12:16 PM

French President Francois Hollande’s weekend is already shot.

The Socialist was slammed by an unexpected roadblock on Saturday, when a judicial council ruled that his flagship policy -- a plan to implement a marginal tax rate of 75 percent on all citizens earning at least €1 million, or US$1.32 million a year -- was unconstitutional. The new rates would have gone into effect in January.

At first glance, the ruling seems like quite a blow to Hollande’s economic philosophy. But in reality, the news isn’t as big as it seems.

First of all, the proposed tax hike was always more symbolic than pragmatic. Second, the court decision was based on technicalities rather than on principle. And most important, Hollande’s pet tariff isn’t dead yet -- the president and his Prime Minister Jean-Marc Ayrault vow to tweak the legislation and keep on pushing.

“The government will propose a new system that conforms with the principles laid down by the decision of the Constitutional Council,” Ayrault said, according to the BBC.

Hollande’s millionaire tax was struck down because it applied to individuals rather than to households. As the court explained in its ruling, the tax rate “failed to recognize equality before public burdens.” In other words, the tariff would have been levied on a single millionaire, but not on a married couple sharing a household and each earning €999,000. This would be a violation of the parameters within which French income taxes already operate.

The apparent sloppiness of the legislation may have been a reflection of the tax’s rather minimal expected impact. The marginal 75 percent rate was proposed as a temporary measure, to be lifted once France made some economic progress. During its limited life span, it would have affected only a few thousand people at most, and the resultant revenues would have done little for France’s bottom line.

As French Finance Minister Pierre Moscovici put it to Reuters, “The rejected measures represent 300 to 500 million euros. Our deficit-cutting path will not be affected.”

Symbolically, on the other hand, the millionaire tax hike was a very big deal. Hollande made it a key platform in his presidential campaign earlier this year. Practical or not, it sent a message to voters that the wealthy -- not just the struggling middle and lower classes -- would be called upon to lift France out of its recession.

Opponents of the bill complained that it would drive investors and job creators away from France. Hollande’s policy was ridiculed by British Prime Minister David Cameron, who famously joked in June that he would “roll out the red carpet” to wealthy French investors seeking a tax haven in the United Kingdom. Parisian millionaires, including the actor Gerard Depardieu and the luxury goods kingpin Bernard Arnault, have threatened to leave the country in order to avoid the heavy new levy.

But Hollande, who campaigned on a promise of loosening austerity in order to ease the burden on the average French citizen, has no choice but to pursue these divisive measures if he is to increase revenues.

The situation is dire. French GDP rose just 0.1 percent in the third quarter of this fiscal year -- less than expected. Unemployment is just over 10 percent, hitting a 15-year high with 3.13 million jobless claims in November. French debt now exceeds 90 percent of GDP. The administration has promised to balance the budget by 2017, and it is pursuing a mix of high taxes and comparatively modest spending reductions.

In this tense environment, the constitutional council’s Saturday ruling may not mean much in any practical sense -- but it will give more ammunition to pro-business opponents of Hollande’s socialist policies. 

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