Sir Menzies Campbell saw off the first major challenge to his authority as leader of the Liberal Democrats today when delegates at the party's annual conference voted overwhelmingly to support radical "green switch" tax reforms developed by his front bench team.

The Liberal Democrats are the only major party where delegates to conference still have the power to set policy. The tax reforms proposed by Vince Cable, the Lib Dems' Treasury spokesman, had raised the ire of traditionalists because they drop the party's longstanding commitment to a 50p top rate of income tax in favour of a redistributive package that shifts the focus on to taxing pollution.

But after an impassioned debate that overran its allotted two-hour slot, delegates voted in favour of the reforms by around two to one after rejecting three amendments, including one tabled by the rebel MP Evan Harris which would have reinstated the totemic 50p rate.

The margin of victory is a major boost to Sir Menzies, who took over as leader in January after the resignation of Charles Kennedy. It came just a few hours before Mr Kennedy, who is still immensely popular with the grassroots, returns to conference to give a valedictory speech this afternoon.

After a hesitant start as leader, particularly in the House of Commons, the 65-year-old has steadily developed a modernising programme and promoted a new generation to his front bench.

It will, however, leave many senior party figures isolated, including Simon Hughes, the party president, Baroness Williams of Crosby, the former leader in the Lords, and well-known parliamentary figures including Bob Willis, Norman Baker and Bob Russell, all of whom had argued against the Cable package.

Welcoming the result - which was more clear-cut than many in the party leadership had expected, Sir Menzies said: "We are going into the next election with bold and credible tax policies. They demonstrate our commitment to tackling inequality and environmental damage whilst maintaining financial discipline."

Opening the debate, Mr Cable said that the 50p tax rate was right for the last general election, to boost public services, but would be unsustainable and put Britain at a disadvantage against its major economic competitors.

But he said that the package, which includes a sharp increase in Vehicle Excise Duty for new gas-guzzling cars and high aviation fuel tax, was finely balanced between taxing income and wealth and "between redistribution and ensuring that there are incentives to entrepreneurs to stay in Britain".

"The real point is this: if we are serious about the environment, if we are serious about climate change, there have to be policies that hurt," he said.

The package, if it were ever implemented, would lift more than two million, mainly low-paid women in part-time jobs, out of tax and national insurance altogether and cut marginal tax rates on the low paid. Its opponents, many of whom fear a drift to the Right under Sir Menzies's leadership, argued that the Lib Dems risked throwing away voter support if they got rid of the 50p top rate.

Among them was Arnie Gibbons, who was a member of the party’s commission on tax policy and who moved the amendment to reinstate the 50p rate. "We don’t have that many populist policies. So let’s not discard one of our best," Mr Gibbons said.

Perhaps the most persuasive intervention in the debate came from Chris Huhne, the party's Environment Spokesman, who was a candidate in the contest to replace Mr Kennedy and is one of the Lib Dems' most committed modernisers.

Summing up on behalf of the motion to adopt the reforms, Mr Huhne argued that the package would not just put the Lib Dems ahead of the curve in the battle to protect the environment, but would give it a soundly-costed and progressive tax platform to take into the next election.

"If you back these proposals we will become the first party in Britain to face the reality of global warming," Mr Huhne said. "We should reclaim the great tradition of this party for telling it like it is, of being open and honest with the public about the challenges we face."

After their victory, Mr Cable and his team have the rather complicated task of distilling the proposals into a clear and understandable manifesto commitment to take to voters at the next election.

The Conservatives, who have most to lose if Sir Menzies manages to reposition the Lib Dems in the political centre and overturn its reputation as a tax-and-spend party, immediately issued a warning that workers would face soaring income tax bills under the small print of the proposals, largely because the party is still backing a local income tax.

Eric Pickles, the Shadow Minister for Local Government, said: "Whatever they claim and whatever they say – Liberal Democrat plans mean just one thing – higher taxes.

"Liberal Democrats cannot shed their addiction to high taxes. Their politicians in town halls charge higher council taxes and their politicians in Westminster want soaring income taxes, a house price tax and another tax raid on private pensions."

Meanwhile, the Lib Dems moved to cover up the divisions exposed in the tax row. Dr Harris, who led the campaign against the Cable proposals, said: "While I'm disappointed in the result, the superb debate we had showed that we remain the only party thiat is democratic...I supported."

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