Economics spokesman Vince Cable caused uproar, not least among colleagues he failed to consult properly, when he announced the 0.5 per cent levy on all £1 million-plus homes in September.
The measure was designed to pay for income tax cuts for most people but raised concerns over the impact on people living in areas with high property prices.
Party leader Nick Clegg responded today by saying the value threshold would be raised to £2 million-plus - taking up to 180,000 homes out of the equation.
The remaining 70-80,000 properties will be hit with a 1 per cent annual levy on the value, which is calculated to increase the income from the measure by nearly half to £1.7 billion.
According to party figures, the average price of all the properties which would now face the bill for the income tax cuts is £4.4 million.
Mr Clegg said it was right that "those with the broadest shoulders" should be asked to foot the bill for tax breaks for people who needed them and said the party's proposals were "the most radical, far reaching tax reform in a generation".
Under the plans, to be detailed at a London event today, the property levy would help pay to take around four million low-paid workers and pensioners out of paying income tax altogether by raising the income tax threshold to £10,000 - also meaning a £700 cut for most workers.
The property levy is designed as a temporary measure until the party was able to implement its plans to scrap council tax and replace it with a local income tax.
Mr Clegg said: "If you want to know how committed a government is to fairness then look at its tax system.
"Gordon Brown has created a tax regime that forces some of the lowest earners in society to pay hundreds of pounds in tax they can't afford, while polluters and rich tax dodgers avoid paying their fair share.
"Meanwhile the Conservatives want tax cuts for millionaires, but say there might be tax rises for everyone else.
"Under our plans people won't pay a penny on the first £10,000 they earn. That would put £700 back in the pockets of the vast majority of tax payers, and take millions of people on low pay out of paying income tax altogether.
"Our plans represent the most radical, far reaching tax reform in a generation.
"They embody everything the Liberal Democrats stand for: fairness; protecting the environment; rewarding hard work.
"It is right to ask those with the broadest shoulders to bear a little more of the burden so that millions of people on normal earnings get the break they desperately need."
Mr Cable, normally a favourite among Liberal Democrats, came under fire after some frontbenchers were apparently kept in the dark about the proposal before it was announced at the party's annual conference in Bournemouth in September.
"We've had quite a robust argument. We have a democratic party and despite what's been said I'm not Stalin," Mr Cable said in the aftermath of the row.
"We could have had more consultation on the detail but we had discussed the broad principle before - it is about making the tax system fairer."
Asked about the change in the mansion tax threshold, Mr Clegg said that what had been agreed in September was "the principle" of the idea.
"Both Vince and I launched this plan at our conference," he told BBC Radio 4's Today programme.
"Subsequently we've looked at it, we've refined it, we've fleshed it out."
He said the shift would increase the revenue that the new tax would raise, adding: "I don't think what's interesting is the process by which this policy was arrived at. What is important is, what does this policy do."
Mr Clegg said that the package would leave more money in the pockets of the majority of taxpayers.
"It is an impeccably liberal package based on the idea that if you work, if you work hard, if you take initiative, you are rewarded. It does bear down on unearned wealth."
He said the plans were "completely different" to those set out by both the Tories and Labour.
"Our approach, our philosophy is completely different," he insisted.
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