George Osborne, who will cut the 50p top rate of tax to 45p in tomorrow's Budget, will leave the door open to a further cut to 40p before the next general election.
The move would mean the abolition of the top rate and would leave people on incomes over £150,000 a year paying the same rate as those earning £43,000 a year and above. However, the Liberal Democrats would demand the introduction of a mansion tax or another form of wealth tax in return for approving another cut in the top rate.
Although a mansion tax on homes worth more than £2 million was blocked by David Cameron, the Chancellor is unlikely to rule it out forever. Cabinet sources said yesterday there is still "unfinished business" in Budget talks and there could be a trade-off next year between a 40p top rate, favoured by many Conservatives, and the wealth tax demanded by the Liberal Democrats.
Some Treasury officials see the advantages of a property-based wealth tax, which would be relatively easy to collect because homes cannot be moved abroad like funds. But Mr Cameron remains reluctant for one of his legacies to be a wealth tax.
As The Independent revealed on Saturday, the 45p rate on incomes over £150,000 is due to take effect in April 2013. In return, Mr Osborne is expected to raise the tax-free personal allowance, which will rise to £8,105 a year next month, to about £9,000 in April next year – a big step towards the Liberal Democrat goal of £10,000.
Nick Clegg is also likely to win a cap on the total amount of reliefs and allowances the rich can claim as a proportion of their income – meeting his demand for a "tycoon tax". The figure could be set at 20 per cent to prevent the rich employing accountants to ensure they pay a smaller share of their income in tax than basic-rate taxpayers.
Although some Liberal Democrat MPs believe this is not the right time to cut the 50p rate, the leadership is preparing the ground for the move. Simon Hughes, the party's deputy leader, said: "The 50p tax rate brings in a relatively small amount of money. My test on Wednesday will be whether the people on high incomes are paying more or less. The priority is to make sure we have a Budget for the millions, not for the millionaires."
Cutting the 50p rate is a huge gamble for Mr Cameron and Mr Osborne, with some Tory MPs believing it could undermine the Chancellor's "we're all in it together" mantra.
Labour believes a cut in the top rate would hurt the Tories and Liberal Democrats. Ed Miliband, the Labour leader, said yesterday: "Labour wants a Budget that makes a priority of jobs, growth and using every single penny of scarce resources to help hard-pressed families make ends meet. Instead, this Government's priority appears to be cutting tax for people earning £150,000 a year. That is the wrong priority and shows how out of touch the Tories are."