Just drop it

Last Updated: Tue, Jan 01, 2013 19:30 hrs

The judges who struck down François Hollande’s controversial plan to slap a 75 per cent tax rate on incomes above €1 million have given the French president an opportunity. He could - and should - drop the idea. But this campaign pledge has become such a hot issue that Hollande might fear he would look stupid if he did the sensible thing. Meanwhile, prospective French tax exiles to Belgium or the UK will not wait for Hollande to make up his mind.

The Constitutional Council didn’t object to the 75 per cent rate itself, but to the details of its implementation. The proposed law was based on individuals’ incomes. But the French tax code recognises households, not individuals. The judges noted that the tax would have introduced massive differences between households with similar joint incomes. For example, a husband and a wife each earning €900,000 a year would pay less tax than if one of the two earned €1.3 million and the other €500,000.

The government could draft a new law to take this objection into account, and keep the 75 per cent rate. In practice, finance ministry officials are privately hinting that it is unlikely a new law could be drafted and put through parliament before next June or September - in other words, before next year’s budget.

The legal development may not be enough to stop the movement of French financiers and businessmen seeking to make their tax home under friendlier skies. They are not only prompted by the higher income tax bracket, but also by new taxes on capital gains which created the impression that the Hollande government is unfriendly to business, in spite of proclamations to the contrary.

Rather than persist, the French president could admit that he made a mistake, and move on. This would require strong leadership to stand firm against the depressingly predictable criticism that would come from the left of his Socialist party. It is up to Hollande to show he has what it takes.

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