Lib Dem leader, Sir Vince Cable (pictured), said in his speech at the party’s annual conference today (18 September) that people on modest incomes should pay less tax.
The Lib Dems are proposing to tax capital gains and dividends, equalising the tax treatment of wealth and work, by taxing capital gains and dividends through the income tax system.
On pension tax relief, the party wants to introduce a flat rate of relief on pension contributions, and limit the tax-free lump sum the wealthiest can withdraw from their pension pots.
They are also proposing that revenues from taxation should be used to create a ‘Citizens Wealth Fund’, which would be used to invest in public services and fund an ambitious programme of lifelong learning to prepare workers for the future economy.
Sir Vince said: "Our manifesto for the next election will spell out progressive tax reforms and an honest approach to tax."
"We need to reverse the trending of fewer and fewer people holding the nation’s wealth.
"Our reforms could raise substantial sums. These would be invested in a sovereign wealth fund, boosted by the sale of [Royal Bank of Scotland] RBS shares."
The government currently owns 70 per cent of RBS, after intervening after the financial crisis. But in June, when HM Treasury sold around 7.7 per cent of its shareholding in RBS, this resulted in a loss to the taxpayer of at least £1.9bn.
Among the proposals is also a reform of inheritance tax. According to this, individuals would be taxed progressively on all large gifts received at the same rates as income from employment, above a tax-free lifetime allowance, instead of the current system of levying tax on the value of an estate left behind.
Similar proposals have been made by the Commission on Economic Justice, whose membership includes the Archbishop of Canterbury.
To address wealth inequality, the commission recommended that inheritance tax be abolished and replaced with a lifetime gifts tax levied on the recipient, with a lifetime allowance of about £125,000.
The Office of Tax Simplification (OTS) is currently reviewing submissions to a consultation into inheritance tax and expects to publish its report in the autumn.
This follows a request from the Chancellor, Philip Hammond, who asked the OTS to determine whether there was an opportunity for simplifying the tax.