UPDATE 3-France readies budget climbdown after business uproar

* Hike in capital gains tax "likely" to be revised

* Extra measures seen needed elsewhere to hit deficit target

* Hollande juggling fiscal rigour with growth imperative

(Adds quotes from finance minister)

By Mark John

PARIS, Oct 4 (Reuters) - President Francois Hollande's Socialist government is likely to ease tax hikes on small businesses in the 2013 budget after a chorus of complaints from French entrepreneurs, officials said on Thursday.

The climbdown comes less than a week after it unveiled 30 billion euros ($38.7 billion) of savings for 2013. It added to speculation that France will need a supplementary budget next year to stick to a deficit target of 3 percent of output, vital to its credibility with euro zone partners and markets.

At issue is a 2 billion-euro increase in capital gains taxes on equity sales which business leaders argue will penalise entrepreneurs who sell their businesses, thus discouraging them from getting it off the ground in the first place.

"We will probably have to change it," Moscovici told France Inter radio of the measure, due to involve a closer alignment of taxes on capital gains with existing levies on income.

"If certain measures are badly calibrated, it must be possible to have a dialogue on that," he said of talks with business lobby groups on possible amendments set for later on Thursday.

Currently, entrepreneurs who sell their business pay capital gains at a rate of 19 percent. However, under the 2013 budget, most would now have to pay a rate of at least 45 percent, a new rate imposed on any income over 150,000 euros.

The retreat followed a high-profile Internet and media campaign by a group of entrepreneurs calling themselves "Les Pigeons" - French slang for "suckers" - arguing that the 2013 budget was skewed against the small business sector.

"We don't want to give the impression that we want to punish the Pigeons," a source in Hollande's office told Reuters. "We'll find a solution ... the Pigeons should return to their nests."

French business argues it is already struggling to compete with German and other rivals because of the high labour charges and other taxes needed to finance a public spending bill which amounts to 56 percent of the overall economy.

After later meeting small-business representatives, Moscovici said the government would extend tax breaks for entrepreneurs who sell their businesses and reinvest the proceeds in other firms.

"We have heard and understood the concerns that were expressed," he said. "We will improve the conditions for exonerating entrepreneurs who reinvest in a new company the capital gains they earned on the company they had managed."

The minister said it was too early to say by how much the measures would reduce tax revenues and how that loss would be made up.


Hollande must show France has the fiscal rigour required to help the euro zone escape from a three-year sovereign debt crisis, while trying to keep election promises to tackle unemployment - already over 10 percent and due to rise with a spate of industrial lay-offs.

The budget envisaged 10 billion euros of savings thanks to a freeze in public spending, 10 billion euros of additional revenues from tax hikes on business and the remainder from increased charges on individuals, particularly the rich.

That was meant to spare the bulk of households from any extra tax burden, so preserving the consumer demand on which Hollande is banking to prevent a slide into all-out recession and maintain next year's modest 0.8 percent growth forecast.

But, highlighting the tight margin for manoeuvre in the euro zone's second-biggest economy, the budget triggered an immediate riposte from employers arguing that it would stymie the corporate investment needed to create jobs and growth.

Pierre Gattaz, head of France's Group of Industrial Federations, welcomed the government's readiness to ease the tax hikes on asset gains.

"It would be a major sign of intelligence and economic pragmatism," he told Reuters at Paris' international auto show.

Axa chief economist Axa Chaney said it was a good sign that Hollande's government was ready to listen to the business lobby but noted it would have to claw in revenues or savings elsewhere in the budget to stick to its deficit target.

"I do think they will stick to the three percent target - they have to - but what I expect is a mini-budget some time next spring," Chaney said.

It is not yet clear how much revenue will be lost if the government waters down the measure.

Fleur Pellerin, minister for innovation and small business, told RMC radio one possible option was to offer tax breaks for any entrepreneur either looking to re-invest over 80 percent of any capital gains.

($1 = 0.7751 euros)

(Additional reporting by Leigh Thomas, Elizabeth Pineau and Julien Ponthus; Editing by Toby Chopra)

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