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Sarkozy's Flagship French Tax Cuts Pass First Hurdle

French President Nicolas Sarkozy's flagship package of tax breaks passed its first hurdle on Tuesday, winning approval from the lower house of parliament.

Drawn up at speed and submitted to an extraordinary session of parliament, the measures represent some of the key pledges Sarkozy made during his election campaign and include tax breaks on overtime pay and mortgage interest rate payments.

One of the biggest ever packages of tax cuts, the measures could end up costing as much as 15 billion euros in a full year but will not weigh too heavily on the 2007 budget deficit, which is forecast to come in at 2.4% of gross domestic product.

However, Paris needs to follow through on plans for offsetting cuts in public sector spending if it is to respect a promise to its European Union partners to deliver deficit cuts year after year.

The opposition Socialists have questioned the wisdom of what they term tax breaks for the rich at a time when France is under pressure from the EU to wipe out its budget deficit by 2010.

But they have no chance of blocking the bill given the government's large majority in both houses of parliament.

Sarkozy's government insists the measures, to be debated in the upper house from July 25, are part of wider structural reform and will lift households' confidence and purchasing power, thus delivering stronger growth and extra tax revenues.

Key Elements

The tax breaks on overtime form a key element of the fiscal package, which Sarkozy has said will restore a work ethic in France and boost household income.

Applicable from Oct. 1, 2007, it will exempt overtime pay from income tax and lower social charges levied on overtime on both employers and workers -- at an estimated cost of about 6 billion euros, according to Economy Minister Christine Lagarde.

The cap on the amount of direct tax that can be levied on income will also be lowered to 50% from the current 60%. An amendment by a centrist deputy to exclude two types of social charges from the cap's scope was rejected.

The lower house of parliament also adopted a tax break that will offer tax relief of up to 20% of mortgage interest rate repayments during the first five years of home loans.

An amendment will allow householders to benefit from this even if they are not living in their main residence under some circumstances.

The fiscal package will also offer some tax breaks to those paying the wealth tax known as the ISF.

Those subject to the ISF will be allowed to invest in small- and medium-sized enterprises and be credited with an equivalent amount against the ISF they are due to pay.

An amendment introduced during the debate in the lower house of parliament will mean that tax exemption on the value of primary residences will rise to 30% from the current 20% for the purposes of calculating the ISF.

Among the last elements of the fiscal package to be debated were changes to corporate governance rules that aimed to tighten the conditions under which "golden parachutes" are awarded to company bosses.

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