A major review of policy, published today, suggests the Liberal Democrats build a "national image in the minds of the electorate" focusing on the principle of "individual freedom".
The consultation document suggests more cuts in public expenditure to pay for "spending priorities". But a review of Liberal Democrat policy on tax suggests putting up national insurance contributions for higher earners to raise a total of £8.5bn.
The prospect of tax rises is likely to face opposition at next week's party conference in Blackpool. Some MPs believe the policy of 50 per cent taxes for high earners put off Tory voters in the last general election and want the party to resist more tax rises.
But a consultation paper on tax policy says that reducing tax payments for low earners would have serious "revenue implications" and " would only be affordable if taxes were raised elsewhere".
"One possible 'progressive' step would be to scrap the upper earnings limit on national insurance contributions, for example. This would raise approximately £8.5bn," the paper says.
The document criticises the Liberal Democrats for failing to explain their "basic purpose" during the general election and says the party must have more than "a few eye-catching headline policies", such as on Iraq.
The paper, Meet the Challenge, produced for a policy review chaired by Mr Kennedy, says the party must develop more "robust" and rigorous policies that are relevant to people's lives.
The paper raises the prospect of further cuts in public spending which may prove controversial among Liberal Democrat activists.
The document asks how the party can achieve greater value for money in public spending and the provision of public services.
Mr Kennedy is already facing a clash with party activists at the party conference over a motion proposing the part-privatisation of the Royal Mail. He risks angering Europhiles by backing a motion capping the EU budget.
Another motion suggests modelling state schools on Harry Potter's school of wizardry, Hogwarts. A house system used in public schools, with points that can be deducted for poor behaviour, would be extended to the state education system.
The policy document, which kicks off a review launched by Mr Kennedy, urges the party to copy Mrs Thatcher's method of presenting "solutions to the electorate". It says her narrative was a model for "long-term political success".
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