Vince Cable: Higher rates of income tax won't ensure fairness

We envisage substantially increased revenue from sectors such as aviation

It would be wrong to see today's debate at the Liberal Democrat conference in Brighton on taxes as a political squabble, just as it is wrong to see it as a referendum on Sir Menzies Campbell's leadership. What we are in fact witnessing is the first serious discussion to be held by a major political party on the future direction of UK tax policy.

The Liberal Democrats are the first party to acknowledge that, in years to come, the debate on tax is less likely to be on how much money a government needs to collect and more likely to be on how it is raised. It is clear that a switch from taxing work towards taxing pollution is inevitable. It is equally obvious that traditional calls for higher rates of income tax are not the best way to make sure everyone pays their fair share.

Symbolism without substance achieves nothing. Today's debate on the party's proposals is about substance. These proposals represent the most radical tax reform package put forward in decades: cutting taxes for millions on low and middle incomes; raising taxes on polluters and on the wealthy; and simplifying and decentralising the tax system. Reform in the interests of fairness, the environment and simplicity replaces our earlier commitment to raising taxes overall, in order to finance expanding public services.

The proposition being put to our conference involves a self-contained, carefully costed package balancing tax cuts against tax increases elsewhere. The tax cuts will increase the amount of money in the pockets of low and middle income earners. This will be achieved by putting the 10 per cent rate to zero and lifting the thresholds for income tax and national insurance, so two million low-paid workers pay neither; cutting the national rate of income tax by 2p in the pound from 22p to 20p; and raising the 40 per cent tax threshold to £50,000.

We are explicit in setting out the tax increases to pay for this radical reform. We would end taper relief on personal capital gains which currently allows senior executives with lucrative stock options and speculative property developments often to pay very little tax. We would also restrict tax relief for pensions to the basic rate of income tax, to stop the abuse of "fat cats" awarding themselves a large pension pot with maximum tax relief. These measures, taken together, raise significantly more revenue than the party's traditional 50p in the pound tax rate which some of our delegates wish to retain.

The new approach strikes a better balance between the taxation of income and wealth and recognises too the need to be careful about the disincentive effects of very high marginal rates in driving high earners overseas.

We also envisage substantially increased revenue from "green taxes" particularly in sectors such as aviation which currently pay nothing like the environmental cost of emissions. Experience - as with the London congestion charge - shows that it is perfectly feasible to change behaviour and raise additional revenue at the same time.

In these ways we achieve a tax policy which is more redistributive, produces a simpler direct tax system, cuts taxes on low-paid and middle-income families and individuals and, through the green "tax switch", challenges the Tories and the Labour Government to match their rhetoric on global warming with serious policy. Our reforms also reinforce our commitment to "localism" by switching council rate revenue to local government. Our continued commitment to replacing council tax with an income based local tax further underlines the progressive nature of the policy.

We recognise that even a set of proposals as radical as these only begins to address some major problems within the tax system. Millions would still be paying income tax below the minimum wage. Britain still has no effective mechanism for taxing appreciating land values. The country's main wealth tax - inheritance tax - is largely avoided by the super rich and increasingly paid by middle-class families on their family home.

The taxation of small businesses, in particular, is unbelievably complex. Our Tax Commission does set a long-term direction of travel within which these issues will be addressed.

But, for the moment, we have set out a practical programme which is both credible and radical and establishes a benchmark for tax reform against which David Cameron and the new Labour leader can be judged.

These proposals point towards the inevitable direction of future tax policy in the UK. It taxes unearned wealth and not the ambitious, it taxes polluting behaviour and not hard work. The Liberal Democrats are the first party to discuss such proposals but they will not be the last.

The writer is the Liberal Democrats' Treasury spokesman