In a bid to seize the initiative in the latest round of talks on funding reform, the Labour leader said he was willing to sacrifice millions of pounds in cash from trade unions.
But his offer was dismissed as “virtually meaningless” by the Tories because it would not cover the bulk of funding from the unions raised via a levy on their individual members.
Mr Miliband issued his bold challenge days after representatives of the main Westminster parties began a fresh bid to thrash out a deal on the long-running dispute.
The effort was given added impetus by the resignation earlier this year of a senior Tory fundraiser who boasted that he could provide access to David Cameron and influence over policy in return for £250,000-plus donations.
Mr Miliband wrote on his website: “At a time when politics is seen as being disconnected from most people’s lives, the public need to know that their elected leaders are not just listening to those who can pay.
“So I believe it is time now for real change: it is time to take the big money out of politics. I am determined that this opportunity to bring about that change is not wasted.
“It is in the interests of our democracy and our country to bring about change.
“I call on David Cameron and Nick Clegg to show the same determination to change our politics.”
Previous reform efforts have failed to reach compromise between the Tories’ reliance on wealthy private benefactors and Labour’s dependence on support from the trade unions.
Mr Miliband said he was ready to take the “painful” step of subjecting donations to a £5,000 cap – half the limit suggested by a sleaze watchdog review last year and a big contrast with the £50,000 proposed by the Prime Minister.
But he signalled that he was unwilling to change rules which mean around three million union members are automatically enrolled into giving £3 a year to a political fund and have to opt out if they do not want to.
“There is the world of difference between a wealthy individual giving millions, and millions of trade union levy payers paying a small sum of money to affiliate to the Labour Party.
“At a time when too much of politics is out of touch with the vast majority, I am proud that all these working people have a role in the Labour Party.”
Political opponents said his refusal to accept an “opt in” system showed he was not serious about reform – pointing out that affiliation fees made up the largest part of the unions’ funding of the party. Conservative co-chairman Baroness Warsi said: “His so-called cap would hit just 1 per cent of Labour’s trade union donations.
“In a week when Unite threatened to bring the country to a halt he wants to make Labour more dependent on union funding and keep it that way.
“Unless Ed Miliband supports a universal cap on donations people will see these as weasel words from a weak leader.”
Labour strenuously disputed Tory claims that the cap would only affect 1 per cent of the money it received from unions – saying the bulk of such cash came in election years which had been ignored in the Tory analysis. A spokesman said the cap would overall have caught more than £9 million of donations to Labour in 2010.
Liberal Democrat deputy leader Simon Hughes said: “We’re pleased that Labour has finally recognised that big money should be taken out of politics and that this includes trade unions,” he said. But questions remain over how committed Labour is to real reform.
“Why does Ed Miliband still disagree with the Kelly proposals that people should have the freedom to opt in to donating to the Labour Party, rather than the complex system of opting out?”
Labour said union members had every opportunity to choose not to contribute to the party and that it would be perverse to “make it harder for people to have a voice”.
Mr Miliband said he accepted that the reduction in funding could not be plugged by any short-term increase in taxpayer funding in the current economic climate, but he suggested that could be revisited after 2015.
He also said limits on party spending should be set “substantially lower” in a bid to reduce the need for parties to seek huge sums from wealthy donors.
A spokesman for the Unite union said it backed Mr Miliband’s effort to “restore faith in politics, and is pleased that the vital link between Labour and millions of working people is valued and will be retained.
“The affiliation to the party is the most transparent money in politics. Now more than ever, it is something to be proud of.”