Sir Menzies Campbell has unveiled a radical shift in the Lib Dems' approach to tax with a 2p cut in the basic rate.
The £20bn cost of the cut would be partially met by a £7bn increase in "green" taxes on cars and flights.
The other £13bn would come from the "very wealthy" via capital gains tax changes on second homes and shares.
Tony Blair attacked the plans as "completely unrealistic" and said airlines would simply avoid the new taxes by re-routing flights.
Sir Menzies is attempting to regain momentum following media criticism of his leadership.
He is dropping the Lib Dems' long-standing policy of higher overall taxes, with his party instead championing "fairer, simpler and greener taxes".
Plans to raise taxes to 50p in the pound for high earners have also gone, Sir Menzies confirmed in his speech which comes as he prepares this weekend to mark 100 days as leader.
'Wealthy' to suffer
The party wants to introduce income tax cuts for everybody - 2p off the basic rate, and two million of the lowest paid will be lifted out of income tax altogether.
The new environmental taxes would mean hitting airlines and people who drive "gas guzzlers" - with road tax likely to rise to over £2,000 for the most polluting new cars.
"My aim is to cut the burden of direct taxes on the low paid and Middle Britain and pay for it by raising taxes on those who pollute the environment and on the very wealthy"
Sir Menzies said: "My aim is to cut the burden of direct taxes on the low paid and Middle Britain and pay for it by raising taxes on those who pollute the environment and on the very wealthy."
But it is not yet clear what the party means by "very wealthy", nor is there a figure of just how many people would be affected by the plans, although it is understood to be "hundreds of thousands rather than millions".
In part that would involve ending capital gains tax breaks for people who have second homes or large share portfolios.
Hard to predict?
Robert Chote, of the Institute of Fiscal Studies, warned that environmental taxes were difficult to manage.
"One dilemma they face here is that the more successful environmental taxes are in getting people to pollute less and getting people to drive less, obviously the less revenue you get in," he told BBC News.
"They are based on such flimsy costings - they could only be produced by a party that knows it is never going to have to introduce a real budget. It is not a serious piece of work"
Mr Blair, at his monthly news conference, said: "The idea that you can have some sort of nice cuddly environmental tax that is going to yield you gains on basic rate of income tax, I mean forget it.
"Not unless you are going to squeeze people pretty hard."
For the Conservatives, shadow chancellor George Osborne said the proposals looked like they had been "worked out on the back of an envelope".
Vincent Cable, the Lib Dems treasury spokesman, said the emphasis nowadays had to be on "value for money" after a "huge splurge of spending".
Around one million people would be taken out of the higher rate of tax, Mr Cable explained.
"I think it does put the Tories on the spot. Since they have made a very clear commitment not to cut taxes, they will presumably be fighting the next election on the same ground," he said.
Ethnic candidates
Sir Menzies meanwhile used his speech to say that if the Lib Dems are serious about power they must reform.
"Our party has remained largely unchanged since we came together in 1988. Change is overdue, necessary and urgent," he said.
But he insisted under his leadership the Lib Dems would "retain our place at the progressive liberal centre".
"The Liberal Democrats have a great opportunity," he wrote in Thursday's Independent.
"Unlike the Tories we don't have to reinvent ourselves. Unlike Labour we don't have to shore up a crumbling edifice ... the sky is the limit."
He announced Lib Dem Ed Davey is to replace Charles Kennedy's ally Tim Razzall as chairman of the party's campaigns committee.
And he revealed he has written to the chairmen of all local Lib Dem branches saying parties choosing ethnic minority candidates to run for the next election will be a "significant factor in determining how much central support" they get.
Sir Menzies will also call for a slimmer Whitehall and a less bloated Westminster.
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