Tories plan green levies to allow income tax cuts

The Tories plan to offer cuts in income tax at the next general election financed by higher taxation on behaviour that damages the environment.

Although David Cameron is refusing to bow to growing pressure from Tory right-wingers to make an immediate promise of tax cuts, the leadership intends to include such a pledge in the party manifesto.

An announcement may not be made until much closer to the election. Until then, the Tory leadership will stick to its policy that a tax cuts promise is unlikely because an incoming Tory government would put economic stability first.

The Tories have already pledged to increase the proportion of tax revenue raised by environmental taxes, which may include a rise in petrol duty and higher road tax on gas-guzzling cars.

They hope to raise enough money to fund limited reductions in personal taxes, which could be targeted at the low paid in an attempt to underline Mr Cameron's message that the party now represents "the many not the few". A cut in business taxes is also likely.

Oliver Letwin, the Tories' policy chief, hinted at the strategy at The Independent's fringe meeting at the party's Bournemouth conference yesterday. He described green taxes as "a very interesting and fruitful line of thought".

One senior Tory source said: "Green taxes are the way we could square the circle. But we are not going to make irresponsible promises. We would have to show the revenue was available."

Today George Osborne, the shadow Chancellor, will face down the leadership's critics by telling the conference that Margaret Thatcher would have put stability before tax cuts. He will say: "We will not back down. We will not be pushed or pulled."

Promising to rebalance the tax system, he will say: "I want to shift the burden from families, jobs and investment on to pollution and carbon emission."

But right-wingers will mount a fightback when Edward Leigh, a former minister, warns a fringe meeting that the Tories could become a "recruiting sergeant" for the UK Independence Party and BNP unless it makes an immediate case for tax cuts, talks about immigration and Europe and avoids a consensus with Labour. Mr Leigh, the chairman of the 40-strong Cornerstone Group of MPs, claimed that at least 100 Tory MPs supported an immediate promise of tax cuts. He criticised the leadership for being "all things to all men".

He said: "It is quite wrong for George Osborne to claim that tax cuts would inevitably destabilise the economy. You cannot win the next election on a diet of spin. We will be torn apart by Gordon Brown unless we meet this head-on now and make the case for tax cuts. The more we say we put stability before tax cuts, the more we fall into Gordon Brown's trap."

John Redwood, the chairman of the Thatcherite No Turning Back Group, launched a pamphlet reinforcing the case for tax cuts.

Mr Redwood insisted there were no splits with the leadership over tax, but his pamphlet openly challenged the leadership strategy, saying: "Lower taxes are not a desirable extra you can add when everything is going fine. Lower tax rates are the way to get everything going well."

Calling for a switch from corporate taxes to green taxes, he said: "I think there is a case for having a more vigorous green policy. If that generates revenue, it is one way of making tax reductions on enterprise."

The pamphlet said there was scope for introducing a general carbon trading scheme to replace existing green taxes such as air passenger duty, landfill tax, the climate change levy and the aggregates levy. It predicted that Tory reforms would focus on the abolition of capital gains tax and inheritance tax.

Lord Tebbit, the former Tory chairman, won rapturous applause when he told a fringe meeting there was a "compulsive moral and economic case" for up-front tax cuts.

He said: "We know that tax cutting works. We have tried it and it works. We tried raising taxes - that doesn't work."