Lib Dems propose income tax cuts and green tax rises

Radical plans to cut income tax and penalise those who damage the environment were unveiled by the Liberal Democrats today.

Under the proposals, the 10p tax band would be abolished - taking 2 million people on low incomes out of tax altogether - and the basic rate cut by 2p.

The 40% top rate would also only apply to annual earnings over £50,000, reducing the bill for another 1.3 million workers.

The top rate of tax, originally conceived to target the wealthy, currently applies to anyone earning £37,295 or more.

The party's move away from a commitment to raising overall tax revenue was signalled by leader Sir Menzies Campbell in June, when he announced plans to abandon the party's 50p top rate of income tax for those earning over £100,000.

But the decision has not received full backing from Sir Menzies' own team and is unlikely to be well received by the wider party.

One Lib Dem shadow spokesman, Dr Evan Harris, has already vowed to lobby next month's party conference to retain the commitment to the top tax rate, which has proved popular among the party's rank and file.

The decision to cut income tax was justified by the Lib Dems' economics spokesman, Vince Cable, today, who insisted there would be no drop in government spending because the measures would be offset by tax hikes for high earners and "green" levies.

The environmentally friendly charges, outlined in a 34-page document, include replacing the duty on individual air passengers with an aircraft tax based on the emissions of each plane, which Mr Cable expects to yield around £8bn for the Treasury.

Other levies include a new top level for the highest emissions, graduating vehicle excise duty more steeply based on their carbon emissions and linking fuel duty to inflation apart from when oil prices were "spiking".

Altogether the plans - described as "fairer, greener, simpler" in the Liberal Democrats' tax commission report - are said to be equivalent to cuts of £18bn a year.

Mr Cable said: "The changes in income tax will make the system fairer for those on low and middle incomes. Specifically, this will benefit the vast majority of pensioners, key public sector workers and young professionals.

"These tax cuts for the majority will be paid for by the wealthy and those with environmentally damaging lifestyles."

Mr Cable said the current tax system was not fair, because the lowest-earning fifth of households paid proportionally more tax than the richest fifth.

The Liberal Democrats want to raise the threshold for national insurance contributions so they start at the same level as income tax, simplifying the system.

But to pay for the cuts, tax relief would be removed for pension contributions outside the basic rate of income tax, and so-called capital gains tax "tapering" - where the levy reduces the longer you hold on to assets - would be scrapped.

In the longer term, the report also indicates the party wants to reform stamp duty on property, so higher rates are only paid on the value above thresholds, rather than the entire sum becoming liable.

Rules on inheritance tax would also be tightened, so gifts given during a benefactor's lifetime would also be taxable.

Mr Cable said: "Our package will radically shift tax and spending priorities while maintaining financial responsibility."

The detailed plans set out in today's report will be voted on at the party's conference in Brighton next month.

Dr Harris, the party's science spokesman, insisted the commitment to a 50% top tax rate on earnings over £100,000 should be retained.

He said the pledge would make the proposed tax package "fairer".

"While these proposals do raise significant amounts of revenue from high levels of wealth, this is less true of high incomes and it is only fair and balanced to do even more to help those on low incomes by asking very high earners to pay a little more in income tax," he said.

"I will be calling for the conference in September to include the 50p top tax rate when this is debated. While it is a small change in the overall package, it would be more fair, more effective and more popular."