With the stroke of a pen, on 30 December 2012, the Constitutional Council annulled François Hollande’s landmark policy of an exceptional tax on earnings over 1 million € set at 75%. With that, the sorry saga of the 75% tax, is apparently at an end. But without the 75% François Hollande would likely not have obtained another percentage: 51.64%, beating Nicolas Sarkozy in May 2012.
If Hollande owes his Presidency to his 75% policy, what happens now?
An Inauspicious Birth
The 75% was a troublesome thing from the very beginning. Announced on live television (Hollande flubbed the announcement having to correct himself several times) without much apparent discussion within the campaign team, the tax was designed to grab the headlines. It worked and became a marker for Hollande. It was proof that he was really a man of the left, rather than the suspicious, greasy Social Democrat that the French left feared he might be. Whilst the campaign rolled on, figures within the moderate left tried to play down the 75% rate, claiming simultaneously that it was unworkable, exceptional, subject to so many exceptions no one would ever pay it, and so on.
Finally in government, the 75% rate posed a number of legal and constitutional problems. Firstly, the Constitution had long been understood to contain a principle of non-expropriation, originating in article 16 of the revolutionary declaration of the rights of man and the citizen in 1793. In effect, the government can’t take everything an individual owns – nor too close to everything (a de facto limit of 80% of income has found favour in recent court decisions). Since the 1990s therefore, to comply with this requirement of the Constitutional Council’s caselaw, a limit has applied, starting at 80% and then dramatically reduced to a cap of 50% during the Sarkozy administration. This bouclier fiscal became a political leitmotif of the left who charged Sarkozy with being the President of the rich, after reports of tax refund cheques of millions of euros were reportedly issued to France’s richest in the middle of the economic crisis.
How to tax the rich
Equity, a Socialist government eager to demonstrate what its idea of fairness was and the ever-present French suspicion of wealth therefore demanded a change of direction. First, a new upper rate of income tax at 45% was introduced for those earning over 150,000 € per year (in fact a much lower burden for those upper middle class earners in Germany, where the top rate of 42% applies over 50,000 €, or even the UK where the 40% rate applies from £35,000 and a new 45% rate will apply from £150,000).
The 75% rate was instituted without too much debate, whilst measures to allow exceptional payments (performing artists in particular – a stalwart of the left) to be spread over tax years thus avoiding the rate, or specifications that the 75% was a marginal rate that included all social contributions (thus bringing down the headline rate a bit), tinkered with the system. The symbolic status was however preserved and the rate was used by commentators on the right to explain the highly mediatised departures from France of Christian Clavier, Alain Afflelou, Bernault Arnault and Gérard Dépardieu, all of whom seem to have been planning for some years their departure.
The decision of the Constitutional Court to reject the rate however focused not on arguments over expropriation, which were not dealt with, but unfairness between different households. French income tax looks at the income of the family unit, with transferable allowances between spouses and children. The 75% rate looked only at an individual, meaning that a family where both adults earned 999,000 € would escape the rate, but a family where one adult earned 1,500,000 € and the other nothing would hit by the 75% rate. Oddly, other exceptional individual taxes, such as the exceptional contribution on pension contributions made on termination of executive employees, have passed muster and the government fired back that the Court had changed its jurisprudence in the matter but that the measure would be tweaked and reintroduced.
Against a background of rumours that the measure would be quietly dropped, the government has maintained that a new provision would be announced in mere weeks, but that it would not be introduced until the next finance bill at the end of the year, when it would therefore only apply to income in 2014. How it will deal with the Court’s demands, and avoid the question of expropriation which still remains a potential hurdle, is unclear.
Keeping the left happy
There is still wide support for the principle of the 75% rate, despite a sustained year long campaign by the UMP decrying it as a measure that would wreck the economy. Experience from the recent US election and the “fiscal cliff” debate would seem to show that the public is not easily convinced that “job creators” and “the rich” are necessarily the same person, nor that they should not contribute more in hard times.
Hollande should therefore be applauded for at least sticking to his principles on this issue, even if the measure itself is probably of limited economic value. Its symbolic force (showing that all are in this together) is much more powerful, and indeed important. Whilst the 75% rate was disastrously announced, ineptly conceived and unconvincingly introduced in its first incarnation, the fact that the government has not used the Court’s decision to quietly bury the measure is brave. It does however demonstrate Hollande’s continued weakness with his own base. Today, public employees are in the streets demanding a pay rise (their pay has been frozen since 2010). Unions are restless in the face of the car industry’s troubles. The government therefore needs to show that, whilst it may seem powerless to deal with the wave of industrial lay-offs, it can at least soak the rich, at least a little. That way, the government hopes, the other percentage in today’s news, Hollande’s approval rating, can edge closer towards 75%.