Taxpayers could be given a discount for living and working in Wales, as part of attempts to boost the country's underdeveloped economy.
The British Government spends £18bn more on Wales every year than it gets back in tax – or £6,008 per head of the Welsh population. At present just one in 16 people earn more than £34,000 – the rate at which the higher 40 per cent tax band kicks in.
Now, The Independent understands, the Treasury is proposing to allow the Welsh Assembly taxation powers that would allow it to vary the rates of tax that apply to people who live and work in Wales.
The plan would allow parties in the Assembly to stand on a platform of tax raising or tax cutting to encourage investment and make the country more competitive. And tomorrow the leader of the Welsh Conservatives will suggest his party would cut tax for those in the middle band of 40 per cent to boost the economy.
"Tax is one of the most important levers that any government has at its disposal," Andrew Davies is expected to say. "If some elements of income tax are devolved, it would be necessary to look at a period of reduced taxation for those paying the 40 per cent tax rate. This would not only send out a strong sign to business in competing regions of the UK, but it would spell out that Wales is well and truly open for business."
The Government is currently considering its response to the Silk Commission which reported late last year and recommended that some tax-raising powers should be devolved to the Welsh Assembly. This would include setting income tax rates as well as stamp duty. It is expected to make an announcement in the spring.
But Conservative sources have suggested that they are in favour of the move which would complement already-agreed plans to give the Scottish Parliament power to vary tax rates which are due to come into effect in 2016.
It is uncertain whether it would need to be approved by a referendum in Wales but an opinion poll for the Silk Commission found that 64 per cent favoured income tax devolution, with 33 per cent against. The poll also found that a majority believed that the Welsh Government would "work harder" to help the Welsh economy grow.
A source said: "Everything is moving in this direction. There is a feeling that having a Welsh Assembly without tax-raising powers does not provide the incentives for politicians to really promote and grow the Welsh economy. At the moment all they do is spend the handout from Westminster." The Silk Commission said it estimated that income tax raised £4.85bn from 1.42 million taxpayers in Wales in 2010-11. HMRC estimates that there were only 89,000 higher-rate taxpayers – seven per cent of all taxpayers – however they were responsible for approximately 33 per cent of all income tax revenue in Wales. Across the country only 4,000 people earn enough to pay the new 45 per cent tax rate.
The Silk Commission said: "If the power to control aspects of income tax were transferred to the Welsh Government this would significantly enhance its ability to make decisions and its financial accountability.
"Changes in income tax could, therefore, have a large influence on the size of the budget for the Welsh Government. The devolution of income tax would also enable the Welsh political parties to offer voters, at the time of elections, a choice between levels of taxation and corresponding levels of public expenditure."
A Welsh Government source said: “Not helping the least well-off people in Wales comes as second nature to the Tories. When people are really suffering financially through Tory benefits cuts, the Welsh Tories are quite happy to ignore the plight of the most vulnerable.
“Equally as worryingly, the Tories have not said where the money to fund this tax cut will be found. They are silent on what services they will be prepared to axe in order to pay for this tax cut.
“The Tories also appear to be quite willing to ignore the view of the people of Wales. The Welsh Labour Government has made its position repeatedly clear that there would need to be a referendum before powers to vary income tax were devolved. We believe the people of Wales should have the final say on this matter. The Tories on the other hand, don't trust the Welsh people to make their views known.
"We believe it’s premature to develop any detailed tax policies at a time when the UK Government has yet to announce whether it will devolve any taxes to Wales, let alone whether it will allow devolution of powers that would permit the sort of rate-varying policy that the Welsh Tories have proposed."