France's top constitutional body has struck down a 75-percent upper income tax rate, dealing a major blow to Socialist President Francois Hollande, who had made it his centrepiece tax measure.
The government vowed to push ahead with the tax rate, which would apply to incomes over a million euros ($1.2 million) a year, and propose a new measure that would conform with the constitution.
The tax rate had angered business leaders and prompted some wealthy French citizens to seek tax exile abroad, including actor Gerard Depardieu who recently took up residency in Belgium.
The Constitutional Council said in its ruling that the temporary two-year tax rate, due to take effect next year, was unconstitutional because unlike other forms of income tax it applied to individuals instead of whole households.
As a result, the council said, the tax rate "failed to recognise equality before public burdens".
Though largely symbolic — it would have applied to only about 1,500 individuals — the Socialists said the tax rate was aimed at making the ultra-rich contribute more to tackling France's budget deficit.
The move was welcomed by the French Football League (LFP) which had expressed concern at the impact on top footballers such as Paris Saint Germain's Swedish star striker Zlatan Ibrahomovic.
LFP chairman Frederic Thiriez said if the measure had reached the statute book there could have been an "exodus of the best players" in the French league.
The 75 percent tax rate was a flagship promise of the election campaign that saw Hollande defeat right-winger Nicolas Sarkozy in May.
Prime Minister Jean-Marc Ayrault told AFP the ruling was a "symbolic but not severe censure" and pledged to ensure the measure was adopted.
"The government will propose a new system that conforms with the principles laid down by the decision of the Constitutional Council. It will be presented in the framework of the next Finance Act," he said in a statement.
"We want to maintain" the measure "because it symbolises the need for the effort to be more fairly shared," he added.
The Constitutional Council also rejected new methods for calculating a separate wealth tax, striking down a provision that would have increased the amount of taxable revenues and capital gains.
Other new measures in the budget were approved, however, including an increase in some upper tax rates to 45 percent and the addition of capital gains to taxable income.
Finance Minister Pierre Moscovici told AFP the ruling "does not compromise" budget efforts and said the council had approved "the essential" of the government's economic policies.
But government critics hailed the ruling as proof the Socialists are pursuing unfair tax policies.
"While the whole world watched us in dismay, Francois Hollande deceived the French into believing that 'taxing the rich' would be enough to solve our country's problems," said the head of the right-wing opposition UMP, Jean-Francois Cope.
"In reality, discouraging entrepreneurs and punishing the most wealthy until they leave our country inevitably puts the tax burden on the middle class. This moral error was sanctioned today."
France is struggling to plug a 37-billion-euro hole in its public finances to meet its target of reducing the budget deficit to the EU ceiling of three percent in 2013.
The 2013 budget included 12.5 billion euros in spending cuts and 20 billion euros in new taxes on individuals and businesses.
Critics have said the new tax measures will stifle economic growth, with the French economy already expected to contract by 0.2 percent in the final quarter of this year.
The 2013 budget is based on a government forecast of 0.8 percent economic growth next year — a figure many economists consider too optimistic.
Hollande has seen his popularity plummet in recent months as the economy stagnates and unemployment mounts.