France's highest court yesterday struck down a 75 per cent upper income tax rate, dealing a major blow to Socialist President Francois Hollande, who had made it his centrepiece taxation measure.
The government vowed to push ahead with the tax rate, which would apply to incomes over €1 million (HK$9.8 million) a year, and propose a new measure that would conform with the constitution.
The tax rate had angered business leaders and prompted some wealthy French citizens to seek tax exile abroad, including actor Gerard Depardieu who recently took up residency in Belgium.
The Constitutional Council said in its ruling that the temporary two-year tax rate, due to take effect next year, was unconstitutional because unlike other forms of income tax it applied to individuals instead of households.
As a result, the council said, the tax rate "failed to recognise equality before public burdens".
Though largely symbolic - it would have applied to only about 1,500 individuals - the Socialists said the tax rate was aimed at making the ultra-rich contribute more to tackling France's budget deficit. It was a flagship promise of the election campaign that saw Hollande defeat right-winger Nicolas Sarkozy in May.
"The government will propose a new system that conforms with the principles laid down by the decision of the Constitutional Council. It will be presented in the framework of the next Finance Act," Prime Minister Jean-Marc Ayrault said after the ruling.
The Constitutional Council also rejected new methods for calculating a separate wealth tax, striking down a provision that would have increased the amount of taxable revenues and capital gains.
Other new measures in the budget were approved, however, including an increase in some upper tax rates to 45 per cent and the addition of capital gains to taxable income.
Finance Minister Pierre Moscovici said the ruling "does not compromise" budget efforts and said the council had approved "the essential" of the government's economic policies.
But government critics hailed the ruling as proof the Socialists are pursuing unfair tax policies.
"While the whole world watched us in dismay, Francois Hollande deceived the French into believing that 'taxing the rich' would be enough to solve our country's problems," said the head of the right-wing opposition UMP, Jean-Francois Cope.
"In reality, discouraging entrepreneurs and punishing the most wealthy until they leave our country inevitably puts the tax burden on the middle class. This moral error was sanctioned today."
The tax had become a focal point of discontent among entrepreneurs and other wealth creators, some of whom have quit French shores as a result. Depardieu, 64, said he was leaving France "because you consider success, creativity, talent, anything different are grounds for sanction".
Billionaire Bernard Arnault, chief executive of LVMH Moet Hennessy Louis Vuitton, filed an application for Belgian nationality in September. He vowed to continue paying taxes in France, but the action sparked fierce criticism from Hollande.
Additional reporting by Bloomberg