Up to 2.5 million people could be lifted out of income tax totally under plans published by the Conservative Party yesterday.

The party's Tax Reform Commission, appointed by former leader Michael Howard, has proposed abolishing the ten per cent starting rate of income tax altogether.

Instead, no one would pay tax until they were earning £7,185 - the rate at which the standard rate begins.

The inquiry, chaired by Lord Forsyth, also called for a cut in the standard rate of income tax to 20 per cent.

It also called for reductions over time in the higher rate of income tax, which is currently 40 per cent and levied on incomes above £38,335.

However it rejected a "flat tax", or a single tax rate for everyone.

The recommendations do not represent Conservative party policy and last night Mr Osborne said the party would not go into the next election with promises of "up front, unfunded" tax cuts. Reductions in personal taxes would be balanced by increases in taxes on pollution, he said.

But the inquiry was seized upon by Labour as evidence that the Conservatives plan to cut taxes and cut public spending.

Steve McCabe (Lab Hall Green) said: "It is clear that the long term aim is to cut taxes for the wealthy."

The report, titled "Tax Matters", estimates the cost to the Exchequer of all the measures at £21 billion.

However, it says this could be achieved over time without making any cuts, as tax revenue rose due to growth in the economy.

It proposes abolishing inheritance tax, and replacing it with a capital gains tax payable on death.

Primary homes would be exempt from the tax, ensuring people were no longer taxed because their home had increased in value over their lifetime.

And company tax, which ranges from 19 to 30 per cent, would be replaced by a single tax rate of 20 per cent.

Shadow Chancellor George Osborne said: "We will not be promising up-front, unfunded tax reductions at the next election.

"We will, however, rebalance our tax system. Green taxes on pollution will rise to pay for reductions in family taxes. This report sets out some options for doing that."

He added: "We will also embark on a major simplification of business taxes that will pay for a significant reduction in our business tax rates.

"This report represents a major step in that direction."

Ed Balls, the Economic Secretary to the Treasury, said the proposed tax cuts would not help ordinary families and would leave a black hole in the public finances.

"The scale of the tax cuts is huge," he said. "The problem is there is no indication here at all as to how it will be paid for.

"David Cameron has denied he would cut public spending. The hole in the finances that this would create is dangerous for the economy."

He went on: "These are tax cuts for the few. This is the same old Conservative party. It's a party that will take risks with the economy."