The Coalition's taxing problem

Mansion tax or 50p top rate? Child benefit for all – or only for those on less than £43,000? With the Budget just two weeks away, the Cabinet is still fighting over how to balance the books

With two weeks to go until Budget day, the normally highly secret preparations are attracting much closer scrutiny than usual as the Liberal Democrats negotiate with the horrified Conservatives in public. The one thing they agree on is that tax is proving the thorniest issue of all.

It is increasingly apparent that David Cameron and Nick Clegg have failed in their attempts to resolve the split between the Coalition parties over the key tax policies, which will be announced to a wary British public by George Osborne in a fortnight.

Yesterday their private horse-trading emerged into the public gaze when Vince Cable, the Liberal Democrat Business Secretary, said his party would allow Tories to axe the 50p top rate of income tax if, in return, they bowed to demands for a mansion tax on homes worth more than £2m.

At first glance, Mr Cable's comments looked like the outline of a Budget deal. However, the two Coalition parties remain deadlocked. Two meetings of the Coalition's most powerful group – on Monday and again yesterday – have failed to end the stalemate. The members of "the quad" are Mr Cameron, Mr Clegg, the Chancellor George Osborne and Danny Alexander, the Liberal Democrat Chief Treasury Secretary.

This week's discussions focused not on a mansion tax, which the Tories oppose, but on other forms of the wealth tax demanded by Lib Dems. Mr Clegg's top priority is not a property tax but to raise the personal tax allowance to £10,000 a year. He wants to fund this through a shift from taxing income to wealth. Other options include higher council tax payments for expensive properties – although Tories are not keen – or restricting tax relief on pensions for taxpayers on the 40p higher rate.

One area of agreement between the two parties is a plan to prevent the rich avoiding stamp duty on expensive homes by placing them in a company, which can sometimes be based offshore. But that might not raise enough money to meet Liberal Democrat demands for tax cuts for low and middle-income groups and the cost of axing the 50p top rate.

Ed Miliband, the Labour leader, said that while the Government should consider a tax on valuable homes, scrapping the 50p rate would be "absolutely the wrong thing to do".

In his final speech before the Budget, Mr Osborne sought to dampen speculation of a giveaway, even if public borrowing turns out to be lower than expected. He told the Engineering Employers Federation last night: "Our action is bringing the deficit down – but it is still far too high. The days of unfunded giveaways are over." Mr Osborne clashed with Labour yesterday over another crunch decision for his Budget – how to withdraw child benefit from families with at least one earner on the 40p tax rate from January.

The Chancellor said: "I think it is fair to ask those in the top 15 per cent of the income distribution to make a contribution to the fiscal consolidation."

But Ed Balls, the shadow Chancellor, said: "The Chancellor's policy on child benefit seems to be that a two-earner family on £84,000 can keep all their child benefit, but a one-earner family on £43,000... will lose all their benefit. What's fair about that?"

Money matters: The political hot potatoes and how they will affect us

Introduce a mansion tax

Proposal

Liberal Democrats want a new tax on properties worth more than £2m, with a 1 per cent annual levy on the value above that. So a house worth £3m would attract a bill of £10,000 a year.

How much would it raise?

£1.7 billion, say the Lib Dems.

How many would it affect?

An estimated 74,000 people.

What are the political risks?

Tories worry it will punish elderly people whose house value has risen.

Will it happen?

Highly unlikely. The Lib Dems would accept the abolition of 50p top rate of tax in return.

Axe the 50p income tax

Proposal

Tory MPs want to see the abolition of the 50p in the pound tax rate introduced by Labour on earnings over £150,000 a year.

How much would it cost?

The Treasury initially estimated it would raise £1.3bn in 2010-11, £3.1bn in 2011-12 and £2.7bn in 2012-13.

How many would it affect?

About 310,000 people are expected to pay it.

What are the political risks?

Cameron is worried that removing it would make the Tories look like a "party of the rich".

Will it happen?

Likely to be reduced to 45p eventually, but not yet.

Dilute child benefit cuts

Proposal

Tory MPs want George Osborne to abandon his plan to withdraw child benefit from families with at least one taxpayer on the 40p in the pound higher tax rate.

How much would it cost?

The original cut was due to raise £2.5bn.

How many would it affect?

About 1.8 million families.

What are the political risks?

It would alienate the middle classes but diluting it would undermine the "we're all it together" mantra.

Will it happen?

Mr Osborne will not abandon his plan but is likely to tweak it.

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