France's top constitutional body on Saturday struck down a 75 per cent 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 (US$1.3 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 start 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.
It was a flagship promise of the election campaign that saw Hollande defeat right-winger Nicolas Sarkozy in May.
"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," Prime Minister Jean-Marc Ayrault said in a statement after the ruling.
The Constitutional Council also rejected new methods for calculating the wealth tax, striking down a provision that would have increased the amount of taxable revenues and capital gains.
A source close to the government said the council's decisions would have a minimal effect, reducing revenues by only 500 million euros in the 300 billion euro 2013 budget.
Other new measures in the budget were approved, however, including an increase in some upper tax rates to 45 per cent and the addition of capital gains to taxable income.
The council also approved a 20 billion euro business tax credit included in the 2012 budget as a way of promoting economic growth and competitiveness.
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 per cent in the final quarter of this year.
The 2013 budget is based on a government forecast of 0.8 per cent economic growth next year -- a figure many economists consider too optimistic.
Hollande, who has pushed policies of economic growth over austerity, has seen his popularity plummet in recent months as the economy stagnates and unemployment mounts.