FORMER Labour leader John Smith was rebuffed by the Treasury when he suggested devolving control of income tax to the Scottish Assembly. The late Labour leader, who was a junior minister in the 1970s, believed the government had "much to gain" from adding financial levers to the home rule package.

But the plan was knocked back amid complaints by the then chancellor Denis Healey that he did not want "pinko devolutionists" setting the agenda on the issue.

The debate is contained in government files released last week by the National Archives.

The correspondence shows a debate took place in early 1977 on whether the Labour government's proposed Scottish Assembly should have powers over taxation.

Smith, then the ninister of state at the Privy Council Office, wrote and circulated a paper called Devolution of Personal Income Tax Within A Block Fund System.

It stated: "The scheme entails the devolution to the Assembly of the yield of personal income tax within a block fund system.

"I believe we have nothing to lose and much to gain by making an enabling provision for such a scheme in the Scotland and Wales Bill."

However, in April 1977, when the Labour government was reviewing its troubled devolution plan, Treasury Minister Joel Barnett outlined his concerns to prime minister Jim Callaghan in a letter.

The Labour MP said taxation powers should not be considered in the study, adding: "A devolved income tax would seriously complicate our existing problems on such matters as incentives and income distribution."

Days later, a memo on who should consider tax powers confirmed the Treasury's hostility to the idea: "As to tax powers the chancellor Denis Healey made it clear he wasn't having a lot of pinko devolutionists in charge of the study of this vital matter."

Another document showed how Smith canvassed the idea of setting up a "North Sea Oil Development Fund", financed by oil revenues and used as a source of "employment-generating investment in parts of the UK with special economic problems".

Neither his idea on income tax, nor his plan for an oil fund, was taken up by the government.

Asked about the "pinko devolutionist" phrase, Healey said: "I don't remember that, actually."

An SNP spokesman said: "If, 30 years ago, John Smith was advocating devolving income tax to a Scottish parliament, then it reinforces the case today for the parliament to be responsible for all tax and spending in Scotland, including our burgeoning North Sea oil revenues."