This part two of Nick Clegg's speech on taxation. Click here to read part one.

Liberal Democrat Tax Plans
 
We already have a radical tax package, cutting the basic rate of income tax to just 16p, to make work really pay for everyone.
 
And scrapping the unfair council tax, which hurts the poorest the most.
 
Council Tax bills have more than doubled since Labour came to power, and the poorest pensioners pay four times as high a percentage of their income than the richest working people.
 
Removing this unfair tax and replacing it with a fair local income tax will massively shift the tax burden away from the poor - and take many people on the lowest incomes out of tax altogether - those who don't pay income tax but are hit by the council tax.
 
It's absolutely vital that we make these tax changes if we want to make work pay.
 
At the moment, for every pound you earn over and above six thousand, at least 31p is lost in tax and National Insurance.
 
But for many, because of the loss of tax credits and means tested benefits like Council Tax benefit, much more is lost. 1.8 million people face an effective tax rate of more than 60%.
 
For the worst affected, the tax rate can be 90p in every pound. And almost all of them are low earners.
 
The moment you add in the cost of childcare - or travel to work - for far too many people work is just not a viable option. And that impacts on the economy.
 
Families who are dependent on benefits and discouraged from working don't have the incomes for the consumer spending the economy needs.
 
So these tax cuts are at the heart of the Liberal Democrat plans. And we will make up the money by taxing pollution and reforming capital gains tax and pensions tax relief.
 
Switching over £8bn of taxation from income to pollution is and will continue to be one of the corner stones of Liberal Democrat tax policy.
 
The other two parties' environmental credentials will not stand up to closer inspection unless they are prepared to use green taxes to change behaviour. 
 
On pensions, we believe everyone should be entitled to basic rate relief on their pension contributions - but higher earners shouldn't get extra money by getting higher rate tax relief.
 
And when it comes to Capital Gains Tax, I look to that great socialist reformer... Nigel Lawson.
 
Following Lawson's model for CGT, we will index-link capital gains and then tax them as income.
 
No more will hedge fund managers be able to present their income as capital to secure themselves an 18% tax rate, while their cleaners pay 31%.
 
Finally, we will dramatically simplify business tax. The Government's constant tinkering fails to meet the basic needs of business: stability.
 
So I want to abolish complex reliefs like R&D tax credits and instead simply cut the headline rate of corporation tax.

Liberal Democrats Going Forward
 
This is already by far the most radical tax package on offer in British politics. It's fully costed to be revenue neutral.
 
But I want to go much, much further, so we can lift even more of the tax burden from low and middle income families.
 
It is likely that the next election will be fought with the UK economy in its weakest state since the Conservative recession of the 1990s.
 
Ordinary families in good jobs and on a decent salary are struggling with rocketing food and energy bills and ever higher debt repayments.
 
So the Liberal Democrats will show that we can spend and tax more intelligently in order to cut taxes for low and middle income families who are feeling the pinch. And take the poorest out of tax altogether.
 
I am setting in motion today a process that will deliver more financial flexibility in government, so that money can be given back to ordinary families. As the economy worsens, now is when they need it most.
 
There are two strands to this process. First, how we can cut tax avoidance, so everyone pays their fair dues. All the extra revenue should be ploughed into reducing rates overall.
 
And second, how we can streamline government expenditure to free up resources.
 
Our aim is simple. If there is money to spare once we have funded our public policy priorities, we will not look for more things to spend it on. We will look for new ways to hand it back - to the poorest families first.
 
Raising The Money - Tax Avoidance
 
It is time to get tough on tax avoidance both by businesses and individuals. It is unacceptable that someone on the minimum wage can pay 31% tax when some of the very richest people and businesses can pay virtually no tax at all.
 
We must stop the drive from companies who decide to locate "virtually" offshore.
 
The UK has much to offer, good communications, a skilled worked force and a desirable place to live. If a company is attracted by these things it must also pay UK tax.
 
A Liberal Democrat Government would have a very simple rule. If your company is based in the UK, you pay tax in the UK - not Jersey or the Cayman Islands.
 
In particular we want to make sure property taxes are paid in full. Buildings and land are, quite clearly, located in the UK or they're not. You can't "offshore" a building - so we shouldn't let them go offshore for tax purposes.
 
Too many top companies and prosperous people in Britain now see no shame in aggressive tax avoidance. It may, strictly speaking, be legal but it lets down millions of hardworking ordinary taxpayers.
 
So over the coming months, we will work with financial experts and business to find ways to make tax avoidance so difficult it is no longer worth trying.
 
I want to send a clear message to businesses and some very wealthy people that tax is not optional.
 
But I pledge that all of the money we identify that we can recoup from tax avoidance will be used to cut taxes for low and middle income earners - not ploughed into extra spending. 
 
Raising The Money - Spending
 
There is always a temptation for governments to spend more and more. The hubris of government deludes ministers into thinking they can solve every problem with a new grant, or an extra spending commitment.
 
This is a fantasy. There is a lot the Government can do to improve people's lives.
 
But it must never underestimate the importance of leaving people's money in their pockets as a tool of real, daily empowerment.
 
So the Liberal Democrats will question every single penny of government spending.
 
David Cameron yesterday distanced himself from the James Review which the Tories produced at the last election on the basis it wasn't credible.
 
He's right it wasn't, but not for the reasons he said. David Cameron now seems to believe that an opposition need not produce any detail on how it plans to change public spending.
 
The James review had the right intention, to identify areas where the Conservatives would cut public spending, it was only incredible because the research was dodgy and the numbers it produced were worse.
 
Making detailed decisions of what you would and wouldn't spend public money on is exactly what a true opposition party should be doing - offering a real alternative to the Government.
 
This is a process we have already started. Our Treasury team of Vince Cable and Jeremy Browne are closely looking at everything the Government spends your money on.
 
This process has already shown that there are times when public money simply shouldn't be spent at all - like on the unnecessary and extravagant ID card scheme.
 
And that public money can be spent much better if, for example, we radically decentralise the NHS, or scale back Tax Credits.
 
We are totally committed to decentralisation - not just of services but of taxes too.
 
Once central government does less, it can tax less.
 
Until Labour or the Conservatives make this basic financial commitment to decentralisation, it's clear their proposals are just talk.
 
Communities will not have real power over local services until they have the power to raise and spend their own money.
 
These are no easy choices and not every penny of Government spending is either good or bad - but it is this lack of rigour and lack of scrutiny which has seen Government spending shoot up over the last decade.
 
We must get away from the Labour notion that if the Government is spending more it must be doing better.
 
We have set a target to reallocate £20 billion of Government spending to Liberal Democrat priorities - taking money away from unnecessary or wasteful policies and redirecting them towards our key priorities.
 
And we will look for ways we can replace some benefits with tax cuts, to reduce bureaucracy and dependency.
 
I just don't believe it's right that a low-income family should pay, say, £3000 in tax and get £2500 back in tax credits, when they ought to just be paying less tax, or no tax at all.
 
I don't believe it's right that 90% of families are eligible for means tested benefits.
 
The Government believes that's part of the stakeholder society - so everyone pays in and everyone gets out.
 
But we, as liberals, believe it is better to enable people to stand on their own than to drag them into state dependency.
 
At every opportunity this Government has tried to creep into people's lives. The benefit system has too often been used as another way of doing it.
 
Reforming the benefit system is not easy, and we will always ensure that vulnerable people do not end up losers. But we must end this merry-go-round where the Government gives with one hand and takes with another.
 
Conclusion
 
Many of the things I have laid out here today are not easy. We have already taken tough choices and we must take more.
 
It is only tough choices that will enable us to reduce the tax burden on those who are overtaxed, and limit the tax burden on Britain as a whole.
 
But I ardently believe we must act - cutting taxes first and foremost for lower earners, so every family can make ends meet, and make a good life for themselves.
 
We must never forget that public money is just that: public.  It is not the government's by right. It is given in trust, and spent for and on behalf of the people.
 
Ministers should be as careful with it as if they had borrowed money from a friend.
 
And that is why a Liberal Democrat Government would ensure that we never spend or tax a penny more than is needed.