Lib Dems plan 2p income tax cut

Radical proposals promising a 2p cut in the basic rate of income tax, funded by a green levy on air flights, and tougher tax rules for the wealthy will be unveiled by the Liberal Democrats this week.

After shadow chancellor George Osborne admitted the Conservatives were unlikely to pledge lower taxes in their next manifesto, the Lib Dems hope the eye-catching 2p tax cut will outflank their rivals and win the support of Middle England.

Vince Cable, the Lib Dem Treasury spokesman, believes he can persuade his party to drop its long-standing commitment to a 50p top rate of tax for those earning more than £100,000 a year, a policy which many MPs fear has damaged their appeal among voters in the past. Party leader Menzies Campbell has already signalled his willingness to abandon the 50p rate, which Cable admits has become a 'totem' for some MPs.

Cable's proposals provoked fierce criticism this weekend from both the Treasury and the Tories. 'The Lib Dems are never going to be in a position to implement a Budget, so they are allowed to come up with all sorts of strange ideas,' said George Osborne. 'It doesn't seem to be a very long time since they were proposing increases in income tax.'

A Treasury spokesman said the scale of the changes Cable was proposing meant it would be hard for the Lib Dems to make their sums work: 'They would need some robust proposals for this to add up.'

Cable explained that his overall fiscal package would be 'tax neutral' - he would collect the same amount of revenue as Gordon Brown - but by reducing the basic rate, and giving more generous allowances to those at the bottom of the income scale, the tax system would be more progressive. 'The slogan we are using is, "fairer, not higher".'

With all three major parties apparently approaching the next election promising almost identical expenditure plans, he added: 'The debate will now be about the structure of the tax system, not the level of public spending.'

Airlines would bear the brunt of the Lib Dems' green tax onslaught, which it would use to raise around £3bn - half the cost of its tax cut proposals.

Cable said compared to other forms of transport, 'air travel is significantly undertaxed,' at present, and the current system of imposing a flat-rate levy on plane tickets was inefficient. 'We would tax the aircraft, rather than the passenger,' he said, admitting that as a result, the growth in passenger flights would reduce.

Other green taxes, such as the controversial climate change levy paid by Britain's businesses, would increase each year at least in line with inflation - and drivers of gas-guzzling cars would be hit with sharp increases in vehicle excise duty.

'You can begin to have a major impact on behaviour, and bring in substantial revenue,' said Cable.

The remaining cost of the 2p tax cut pledge would met by 'more progressive taxes on wealthy people,' but without the headline-grabbing increase in the top rate which the Lib Dems have promised at the past two elections, Cable said.

'For example, if you make a big gain on the sale of a second home, or on shares, you tend to receive more favourable tax treatment than if it was ordinary income,' Cable explained. He would like to see more of wealthy investors' gains counted as income, and taxed accordingly.

Campbell will trail the plans in a speech to the City this week, and fully costed proposals will be revealed in the report of the Lib Dems' tax commission next month. The policy will then be voted on at the party's autumn conference in Brighton in September.