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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French court rejects 75 percent millionaires' tax

France's President Francois Hollande speaks at a news conference at the end of the first session of a two-day European Union (EU) leaders summit in Brussels October 19, 2012.

Credit: Reuters/Christian Hartmann

By Emile Picy and Catherine Bremer

PARIS | Sat Dec 29, 2012 11:25am EST

PARIS (Reuters) - France's Constitutional Council on Saturday rejected a 75 percent upper income tax rate to be introduced in 2013 in a setback to Socialist President Francois Hollande's push to make the rich contribute more to cutting the public deficit.

The Council ruled that the planned 75 percent tax on annual income above 1 million euros ($1.32 million) - a flagship measure of Hollande's election campaign - was unfair in the way it would be applied to different households.

Prime Minister Jean-Marc Ayrault said the government would redraft the upper tax rate proposal to answer the Council's concerns and resubmit it in a new budget law, meaning Saturday's decision could only amount to a temporary political blow.

While the tax plan was largely symbolic and would only have affected a few thousand people, it has infuriated high earners in France, prompting some such as actor Gerard Depardieu to flee abroad. The message it sent also shocked entrepreneurs and foreign investors, who accuse Hollande of being anti-business.

Finance Minister Pierre Moscovici said the rejection of the 75 percent tax and other minor measures could cut up to 500 million euros in forecast tax revenues but would not hurt efforts to slash the public deficit to below a European Union ceiling of 3 percent of economic output next year.

"The rejected measures represent 300 to 500 million euros. Our deficit-cutting path will not be affected," Moscovici told BFM television. He too said the government would resubmit a proposal to raise taxes on high incomes in 2013 and 2014.

The Council, made up of nine judges and three former presidents, is concerned the tax would hit a married couple where one partner earned above a million euros but it would not affect a couple where each earned just under a million euros.

UMP member Gilles Carrez, chairman of the National Assembly's finance commission, told BFM television, however, that the Council's so-called wise men also felt the 75 percent tax was excessive and too much based on ideology.

FRANCE UNDER SCRUTINY

Hollande shocked many by announcing his 75 percent tax proposal out of the blue several weeks into a campaign that some felt was flagging. Left-wing voters were cheered by it but business leaders warned that talent would flee the country.

Set to be a temporary measure until France is out of economic crisis, the few hundred million euros a year the tax was set to raise is a not insignificant sum as the government strives to boost public finances in the face of stalled growth.

Hollande's 2013 budget calls for the biggest belt-tightening effort France has seen in decades and is based on a growth target of 0.8 percent, a level analysts view as over-optimistic.

Fitch Ratings this month affirmed its triple-A rating on France but said there was no room for slippage. Standard & Poor's and Moody's have both stripped Europe's No. 2 economy of its AAA badge due to concern over strained public finances and stalled growth.

The International Monetary Fund recently forecast that France will miss its 3 percent deficit target next year and signs are growing that Paris could negotiate some leeway on the timing of that goal with its EU partners.

The INSEE national statistics institute this week scaled back its reading of a return to growth in the third quarter to 0.1 percent from 0.2 percent, and the government said it could review its 2013 outlook in the next few months.

Saturday's decision was in response to a motion by the opposition conservative UMP party, whose weight in fighting Hollande's policies has been reduced by a leadership crisis that has split it in two seven months after it lost power.

The Constitutional Council is a politically independent body that rules on whether laws, elections and referenda are constitutional.

($1 = 0.7564 euros)

(Reporting by Emile Picy; Writing by Catherine Bremer; Editing by Alison Williams)

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Venezuela sees 2012 inflation at 19.9 percent, below target

CARACAS | Sat Dec 29, 2012 12:07pm EST

CARACAS (Reuters) - Venezuelan inflation reached 19.9 percent in 2012, the central bank said in a preliminary estimate on Saturday, beating its official target thanks to strict price controls that business leaders say are unsustainable in the long term.

The government of President Hugo Chavez has capped prices for a wide range of consumer goods, helping contain inflation that has traditionally been the highest in Latin America. The 2012 target had been between 22 and 25 percent.

But inflation is seen accelerating in 2013 because Venezuela is expected to devalue the bolivar currency after heavy campaign spending this year that helped ensure Chavez's re-election.

Devaluing eases fiscal pressure on the government by providing more bolivars for each dollar of crude exports, but also pushes up the cost of importing basic consumer goods that are not produced in the oil-dependent country.

In late 2011, when prices rose 27.6 percent, the government began extended a system of controls that now regulate prices of products ranging from deodorant to meat while fixing profit margins.

This helped keep prices in check in an election year despite heavy government spending on welfare programs ranging from construction of homes for the poor to monthly cash stipends for single mothers.

But business leaders say the controls have kept prices artificially low, and that inflation is likely to bounce back.

Authorities on Thursday released preliminary estimates showing the country's economy grew 5.5 percent in 2012, with the construction sector among the fastest-growing thanks to a state homebuilding program.

(Reporting by Deisy Buitrago and Mario Naranjo, Writing by Brian Ellsworth; Editing by Vicki Allen)

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Apple CEO's pay package drops 99 percent from 2011

Apple CEO Tim Cook speaks to the audience during an Apple event in San Jose, California October 23, 2012.

Credit: Reuters/Robert Galbraith

NEW YORK | Thu Dec 27, 2012 1:12pm EST

NEW YORK (Reuters) - Tim Cook has finally made it to the top at Apple Inc, but in his first full year as CEO his pay package shrank about 99 percent.

Cook, the successor to the late Steve Jobs, was awarded total compensation of $4.17 million in 2012, down from $378 million in 2011, Apple said in a federal filing on Thursday.

The 2012 compensation package for Cook, who took over as chief executive in August 2011, also seemed a pittance compared with his 2010 pay, which was 14 times higher, when the executive served as chief operating officer.

Jobs, the iconic CEO and co-founder, died in October 2011 of pancreatic cancer.

The maker of the iPhone and iPad noted that Cook will not receive any stock awards for 2012 after he was given about $376.2 million in stock awards the year before. The stock awards vest over many years.

The 2012 package includes a salary of $1.4 million and a nonequity bonus of $2.8 million, according to the filing. Cook's base salary actually increased compared with the $900,000 he earned in 2011.

While Apple's shares are 35 percent higher than when Cook assumed the CEO role, they have fallen more than 27 percent since October when they hit a $700.10 high.

Apple shares were down 0.6 percent at $509.85 on the Nasdaq late on Thursday morning.

(Reporting by Sinead Carew and Liana Baker; editing by Kenneth Barry and Matthew Lewis)

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