Instead of increasing income tax, as Labour then intended, the commission is examining the possibility of raising the threshold at which income tax is paid and increasing taxes on 'resource use' such as roads. Taxes would also be imposed on consumers and companies causing pollution and environmental damage.
The ideas are being debated within the commission, which was appointed by John Smith, the Labour leader, in January to 'think the unthinkable' about the future of the welfare state.
They are likely to produce a clash with the party's more traditional view, which will be advocated this week on the eve of his union's annual conference by Bill Morris, leader of the Transport & General Workers' Union, when he calls for sharp rises in income tax for those earning more than pounds 50,000.
The commission is also investigating the feasibility of integrating the tax and benefit systems. If a merger is not practical, other fundamental changes are inevitable, according to Patricia Hewitt, the commission's deputy chair, who was policy co-ordinator to the former Labour leader Neil Kinnock.
Ms Hewitt said: 'Under the present system people are taxed into poverty and forced on to benefits to supplement their wages.
'The commission is working on plans to raise the threshold at which income tax is paid. The benefits system would also be changed so that people who take low-paid or part-time jobs - or their partners - do not lose benefits. This would provide unemployed people and those on low incomes with an incentive to work to raise themselves out of the poverty trap.'
Although the commission has not drawn up firm proposals, Ms Hewitt said she had already concluded that the present tax and benefit systems must be changed to achieve greater social justice.
The commission's views are the first indication of the left's thinking on how to reduce the spiralling social security budget - pounds 80bn this year - and reduce the budget deficit, which is projected at pounds 50bn.
The commission's plans will be presented as a radical alternative to the Government's proposals for cutting benefits and increasing taxes, such as VAT on fuel, which hit the poor hardest. They also differ widely from the sweeping reforms being considered by Peter Lilley, Secretary of State for Social Security, who announced earlier this month 'cautious propositions' for giving benefits to fewer people and encouraging people others to opt out of state benefits.
The commission's draft proposals are likely to be published later this year and refined into recommendations by summer 1994. They are likely to be adopted as Labour Party policy.
Run under the auspices of the Institute of Public Policy Research, a left-of- centre think-tank, the commission is chaired by Sir Gordon Borrie, former director general of the Office of Fair Trading. Its remit is to define social injustice and its causes, from poverty to unemploymentIts first two reports will be published this month. One, called 'The Justice Gap', analyses the distribution of wealth and income and shows two-thirds of the population live in households with earnings below the average pounds 14,600 after tax.
The clearest Tory attempt since the election to align the party with the European Christian Democrats was made yesterday by David Hunt, Secretary of State for Employment, writes Donald Macintyre.
He staked his claim as a senior spokesman for the pro-European, left-of-centre wing of the party, by rejecting Labour claims that the Conservatives stand only for laissez-faire individualism.
Mr Hunt told a Tory Reform Group conference in Oxford that Conservatives were united by their belief in decentralisation and individual responsibility, and in 'rejection of the socialist nightmare'. But he insisted: 'Companies should take responsibility for the welfare of their employees and for the wider social consequences of their activities.'
In terms which will antagonise Thatcherite, anti-European Tories, he envisaged 'the unions between the peoples of Europe' growing 'ever closer, inch by questioning inch'.