Lib Dems may support controversial flat-tax plan

The Liberal Democrats are to consider ditching their policy of a 50p top rate of income tax on earnings above £100,000 in favour of a flat-rate tax.

The idea will be investigated by a commission on tax, to be announced today by the party leader, Charles Kennedy, which will recommend a new policy by the autumn of next year.

Vince Cable, the Liberal Democrat Treasury spokesman, said the party would maintain its commitment to a progressive tax system. He believed this could be achieved if a "flat tax", which is gaining acceptance in eastern European countries, was accompanied by an increase in tax thresholds to help the low-paid.

Mr Cable hopes the wholesale review will result in the party adopting more liberal economic policies. "We don't permanently want ourselves badged as a party of high taxation," he said. "But we will ensure there is a fair tax system."

However, the idea of a flat tax, lauded by free-marketeers, will be opposed by some Liberal Democrats. Although the party's polling did not suggest that the 50p top rate cost it votes, party sources said the policy was "back in the melting pot" because the review was a genuinely open one.

The party will also consider whether to drop its plan to replace the council tax with a local income tax. Some MPs say it was a vote-loser, but others will fight hard to keep it and believe it will survive the review, which will be chaired by Michael Williams, a former senior Treasury official. He will also look at business and environmental taxes.

Mr Kennedy will say today: "In order to challenge for power at the next election, the Liberal Democrats must demonstrate over this parliament that the economy will be safe in our hands. To maintain that credibility, the carefully costed plans we laid out at the election will necessarily be updated, taking account of the direction of the economy and the requirements of society."

He will add: "Taxation should be fair - based on people's ability to pay. It should be straightforward and open - so that people see where their money is being spent. Taxation should frame a competitive business environment, and it must encourage sustainability, with economic instruments used to deliver public policy objectives."

He will say that the "liberal approach" to taxation stands in stark contrast to the approach of the Chancellor, Gordon Brown - "complication, stealth and short-termism".