The Fabian Society says the government should introduce an earmarked 'NHS tax' on cigarettes and alcohol - although it flies in the face of Treasury thinking.

And the amount of income tax spent on the NHS should also be separately identified in pay slips, suggests the Labour-affiliated Fabian Society.

Health secretary Alan Milburn this week distanced himself from the idea despite newspaper speculation that he is in favour.

The Fabian Society plan is in line with the Liberal Democrat idea of a 'hypothecated tax'. In March chancellor Gordon Brown's Budget pledged that a 5 per cent increase in tobacco tax, worth£300m, would go directly to the NHS.

The proposal emerges from a commission set up by the society to look into taxation, chaired by Labour peer Robert Plant.

Lord Plant said: 'Our research shows that the public are not interested in tax cuts. They want the 20year decline in public services to be reversed. But they also want to feel confident that their taxes are being spent well.'

His report proposes that around half of income tax, along with alcohol and tobacco duties, should be earmarked for the NHS, so people can see exactly where it is being spent.

According to the Fabian Society's general secretary, Michael Jacobs, the UK spends 4 per cent less of its national income from tax than the EU average.

'That's£40bn a year. You only need to look around at our collapsing public services to see the result.'

He acknowledged, though, that there was a danger the NHS tax could be eroded, in the same way national insurance has been over the years. Three members of the commission had dissented from the proposal, he added.

'We're not saying it's going to be easy. All taxes are in the hands of politicians, but transparency is the whole point.'

He said Mr Milburn had favoured the idea in the past - although that was before the NHS received extra cash from the Treasury.