* Tax plan rejection is political blow to Socialist Hollande
* Ruling opens window to dilute tax plan and restore French
* Ditching 75 pct supertax would have small impact on
By Catherine Bremer
PARIS, Dec 31 An embarrassing derailment of
President Francois Hollande's 75 percent millionaires' tax may
open an opportunity to water down a scheme that had damaged
France's image with international investors, but he is unlikely
to give up without a fight.
Finance Minister Pierre Moscovici has promised a redrafted
tax on the wealthy will be pursued next year, following the
Constitutional Council's decision on Saturday to strike down the
emblematic rate on income over 1 million euros ($1.32 million).
However, Moscovici has so far avoided referring specifically
to the 75 percent rate which has made some of France's wealthy,
including film star Gerard Depardieu, announce they will move
In the banking community at least, expectations are growing
that the tax may look very different when the Socialist
government comes back with the revised plan, even though the
original enjoyed strong support among the French public.
"I suspect this tax will be shelved. In the worst case he
will come back with a lower rate and in the best case it will be
binned," said Philippe Gudin, a France economist for Barclays
and a former Treasury official.
"For the (low amount of) revenue it would raise, the outcry
it has provoked and the damage it has done to France's image, it
would be more sensible if it were quietly buried."
The Council said the tax was unfair as it would hit married
couples where only one partner earned above a million euros but
would not affect couples where each earned just under a million.
Opinion polls show that six in 10 French people back the
tax. But while it would have affected only 2,000-3,000 people
and raised just a few hundred million euros a year, criticism
from the business sector and high earners has been incessant.
Hollande finds himself stuck between trying to appease
investors who see him as anti-business and showing voters he
remains serious about making the rich cough up more taxes.
Political analyst Olivier Duhamel said the government could
accept the Council's ruling by making the 75 percent tax
applicable to households, rather than individuals, and possibly
raising the income threshold to 2 million euros.
Alternatively, it could using the Council's rejection as
justification for making the politically risky decision to ditch
the whole idea. "In politics, when things get difficult, you are
stuck with unpleasant choices," said Duhamel.
The ruling will have little effect on public finances but it
embarrassed the government again only a few weeks after it
suffered a public relations fiasco over an attempt to rescue two
shuttered steel furnaces.
Hollande will be wary of compounding his problems. "Giving
up the 75 percent tax without a fight would be an admission of
political weakness," said Stephane Rozes, of the CAP political
French media have reported even one of Hollande's economic
advisers muttered in private that a 75 percent tax rate amounted
to turning France into "Cuba without the sunshine".
Deutsche Bank's Gilles Moec also believed Hollande had
little to gain by picking a fight with his own supporters by
surrendering, but might go for the higher 2 million euro
threshold, meaning far fewer people would be hit.
"The damage to France's reputation is done. If they scrap it
entirely they don't gain much and they get into trouble with
their left wing. This would be a compromise," he said.
Hollande may clarify his plans for a redrafted supertax rate
in a New Year's Eve speech on Monday evening.
Hollande has been walking a tightrope since taking power in
May as he tries to square his electoral priorities with the
demands of financial markets and hold together a government made
up of left-wingers and more pro-reform centre-leftists.
Famous for having once said that he disliked rich people, he
vowed from day one to fight Europe's focus on austerity policies
and partially reversed a law that raised the retirement age.
He announced his 75 percent tax idea out of the blue on live
TV midway through a campaign that was being overshadowed by a
hardline leftist rival. It came as a shock even to his future
budget minister Jerome Cahuzac who stumbled when questioned
about it on French radio, saying he was not aware of the plan.
After six months in power, Hollande swung around and
announced market-friendly moves to raise sales taxes and cut
spending to fund tax relief for companies, explaining the nation
that the scale of the economic crisis made this necessary.
He also capitulated to furious entrepreneurs who revolted
over plans to raise capital gains taxes in 2013, agreeing to
scrap the measure for small business owners.
Hollande seems to be struggling, however, to find the right
path to tread. The 75 percent tax reversal is the latest in a
series of communications gaffes that have critics muttering that
he is figuring out policy as he goes along.
Hollande was ridiculed in November after London Mayor Boris
Johnson, a British Conservative, likened his government to
French revolutionaries for its threat to nationalise a
steelworks where ArcelorMittal planned to shut two
ageing blast furnaces.
In the end, the government secured only a promise that
furnace workers would get jobs elsewhere, infuriating unions.
The tax setback, which drew scathing reactions in French
media, is a new blow to Hollande's credibility. Senate finance
commission head Jean Arthuis said the government had been
punished for its "dogmatic blinkered state and its amateurism".
Commentators said Hollande was now in a corner over how to
tweak the tax proposal to make it applicable to households -
like regular income tax - rather than individuals without making
it apply to tens of thousands more couples.
"This is a major legal mistake that could clearly have been
avoided," Thomas Piketty, an economist who backs supertaxes on
the rich and helped inspire the 75 percent tax, told Liberation.
"The Socialist Party had 10 years in opposition to prepare a
coherent fiscal reform. We get the impression they have not done
enough work on this crucial issue."