Kennedy drops plan to squeeze high-earners

In a speech setting out his strategy, the Liberal Democrat leader said: "We do not need and we should not seek a punitive taxation system. High taxes are not a moral good in themselves." Although his party was not afraid to use the word "redistribution," he added: "We should feel no awkwardness about the use of the word profit either."

His Westminster speech, which comes as a Liberal Democrat commission starts to review tax policy, is a signal that he does not want to position his party to the left of Labour and allow its opponents to brand it a "high- tax" party.

Some Liberal Democrats believe their pledge to raise the top rate of tax may have cost it votes at the general election in May, when Labour pledged not to raise income tax rates and the Tories offered £4bn of tax cuts.

Mr Kennedy said: "We were correct to point out at the general election that only 1 per cent of all taxpayers would be affected by our proposals on top-rate taxation. But we must not lose sight of those who aspire to achieve income levels which will bring them into the top-rate taxation band in time to come. So we should not fall into the trap of believing that through taxation and spending we can cure all ills."

He tried to silence a whispering campaign against his leadership by saying that "positive unity" was "critical" for the party. He gave a nod to critics who have urged him to be more bold by agreeing the party needed to take risks.

"There is no way forward if we opt for the easy life, heads kept securely safe below the parapet," he said. "If we're not prepared to live a little dangerously at times, then the far greater danger is that we just don't live at all."

The party needed to "avoid complacency" and be "a dynamic, forward-looking and progressive force in politics". He added: "Twenty-first century Liberalism has to be about more than the politics of protests or the need for principled positions within politics. It has to be about presenting ourselves as credible contenders for power, not just for its own sake, but because of what we want to do with it as we gain more."

Mr Kennedy said that his party needed "a better-developed account of ourselves and a prescriptive analysis of our country". He added: "We need a more holistic picture, which brings together better in people's minds how our various individual policies both relate to each other and add up overall." After criticism that the party did not have distinctive policies on public services, Mr Kennedy acknowledged there was a need to "develop credible, alternative proposals to the changes that Labour is making in the structure and delivery of our public services, particularly in health and education." It would face more tough choices on spending, he said.

He asked the tax commission to make proposals to strip away complicated allowances and create a simpler, fairer structure of taxation with measures to tackle avoidance and evasion. Mr Kennedy has asked Mark Oaten, the home affairs spokesman, and Ed Davey, the education spokesman, for "innovative ideas" on how to stop young people becoming disaffected and showing no "respect". They will look at "the interface between school and society and those important years when children move into adulthood".