French government may water down 75 percent tax after setback

France's Finance Minister Pierre Moscovici speaks during a news conference at the Economy Ministry in Paris December 19, 2012.

Credit: Reuters/Charles Platiau

By Catherine Bremer

PARIS | Mon Dec 31, 2012 11:47am EST

PARIS (Reuters) - 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 abroad.

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 consultancy.

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.

"BLINKERED STATE"

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 nationalize a steelworks where ArcelorMittal (ISPA.AS) 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." ($1 = 0.7564 euros)

(Additional reporting by Jean-Baptiste Vey; editing by David Stamp)

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Exports, government spending buoy growth

1 of 2. A general view of the Port of Los Angeles, California November 29, 2012.

Credit: Reuters/Lori Shepler

By Lucia Mutikani

WASHINGTON | Thu Dec 20, 2012 11:24am EST

WASHINGTON (Reuters) - The U.S. economy grew faster than previously estimated in the third quarter as exports and government spending provided a lift, but that boost is likely to be lost amid slowing global demand and a move towards tighter fiscal policy in Washington.

Other data on Thursday showed factory activity in the mid-Atlantic region picked up this month, while home resales in November were the best in three years.

However, a rise in first-time applications for unemployment aid last week suggested job growth remained modest.

Gross domestic product expanded at a 3.1 percent annual rate, the Commerce Department said, a step-up from the 2.7 percent pace it reported last month.

It was the fastest growth since late 2011 and beat economists expectations for a 2.8 percent pace. In addition to upward revisions to exports and government spending, consumer spending was also a bit stronger than earlier thought.

"We still expect growth to decelerate in the fourth quarter. Beyond that, all will depend on the resolution of the fiscal cliff negotiations," said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.

The "fiscal cliff" refers to automatic government spending cuts and higher taxes that could suck about $600 billion from the economy early next year unless the U.S. Congress and the Obama administration can agree on a less drastic plan to cut the budget deficits

In second report, the Philadelphia Federal Reserve Bank said its business activity index rose to 8.1 from minus 10.7 in November, boosted by a rebound in new orders and shipments. That is a hopeful sign for the manufacturing sector, which has slowed in recent months.

Separately, the National Association of Realtors said existing home sales surged 5.9 percent in November to a seasonally adjusted annual rate of 5.04 million units.

It was the highest since November 2009 and confirmed the housing market recovery was strengthening.

"We are seeing ongoing momentum in the housing market. The sky is not falling on manufacturing. There were concerns earlier this summer. The contribution from housing-related manufacturing is making a difference," said Robert Dye, chief economist at Comerica in Dallas.

Still, the housing market recovery lacks the depth to replace manufacturing as the economy's growth engine.

MODEST JOB GROWTH

In a fourth report, the Labor Department said initial claims for jobless benefits increased 17,000 to a seasonally adjusted 361,000, in the low end of the range they held before Superstorm Sandy struck in late October.

The data covered the survey period for the government's report on December nonfarm payrolls and suggested modest job gains.

"The pace of hiring is still disappointing," said Tanweer Akram, a senior economist at ING Investment Management in Atlanta, adding that the pace of GDP growth in the current quarter "remains quite soft."

Akram said businesses appeared to be holding back out of concern the fiscal cliff could hit the economy hard.

Even if lawmakers and the White House agree on a plan to avoid the brunt of the blow, a tighter fiscal policy and a cooling global economy will likely still weigh on U.S. growth in coming quarters.

A Reuters poll of economists earlier this month showed a median forecast for GDP growth in the current quarter of just a 1.2 percent annual pace. Economists expect GDP to expand just 1.9 percent next year.

Job gains so far this year have averaged 151,000 per month, a pattern that is likely to hold through December.

Growth in the third quarter was revised higher to show a much faster pace of export growth and the first decline in imports in more than three years.

Exports grew at a 1.9 percent rate, rather than 1.1 percent, helping to narrow the trade deficit. Trade contributed 0.38 percentage point to GDP growth. The drop in imports is a sign of weak domestic demand.

Government spending was revised to a 3.9 percent growth rate from 3.5 percent, boosted by a rebound in state and local government outlays. It added three quarters of a percentage point to GDP growth in the third quarter.

While growth in consumer spending, which accounts for about 70 percent of U.S. economic activity, was raised by 0.2 percentage point to a 1.6 percent rate, that was mostly due to increased spending on healthcare.

Business inventories were trimmed to $60.3 billion from $61.3 billion. Restocking by businesses contributed 0.73 percentage point to GDP growth.

Given the still sluggish spending pace, some of the inventory accumulation might have been unplanned, suggesting businesses will need to liquidate stocks this quarter because of weak demand.

Excluding inventories, GDP rose at a revised 2.4 percent rate. Final sales of goods and services produced in the United States had been previously estimated to have increased at a 1.9 percent pace.

(Additional reporting by Jason Lange in Washington and Ellen Freilich in New York; Editing by Andrea Ricci)

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