We use optimal tax rules to evaluate the optimality of taxation for lone mothers in Germany and Britain

The Government thinks it is paying out tax credits or out-of-work benefits to around 200,000 more lone parents than the Office for National Statistics estimate live in the UK, according to an analysis of official statistics by researchers at the IFS.

This Briefing Note compares five recent studies that have examined the labour market impact of the Working Families' Tax Credit and related reforms between 1999 and 2002.

This Briefing Note assesses the likelihood that the government will meet its child poverty target in 200405 in the light of decisions made in Pre-Budget Report (PBR) 2003. It updates the analysis presented in What Do the Child Poverty Targets Mean for the Child Tax Credit? An Update, IFS Briefing Note 41, which was written before PBR 2003. We agree with the assessment in PBR 2003 that the government should comfortably meet its target measuring incomes before housing costs (BHC). It also concludes that the government is on course to just hit its target measuring incomes after housing costs (AHC).

The government has a target for child poverty to fall to 3.1 million by 2004-05, measured by the number of children in households with less than 60% median income after housing costs. The latest data showed that 3.8 million children (30% of children in Britain) were in poverty in 2001-02 on this definition. To help achieve the target, increases to means-tested benefits and tax credits need to take effect in April 2004, and therefore need to be announced in the forthcoming Pre-Budget Report.

The child tax credit and working tax credit were introduced in April 2003. When fully operational, the child tax credit will represent the majority of government financial support for children. It is designed to simplify the system of financial support for parents, and provides support that is means-tested against family income. The working tax credit is designed to make work more financially attractive. It means that people with or without children in work and on a low income may receive extra help from the State. This Briefing Note looks at the changes that have been made and asks why the new tax credits have been introduced, how they work, the cost and distributional impact, the impact on work incentives and what levels of take-up we might expect.

In 2003: the government will introduce new tax credits to provide financial support for children and low-paid workers: the integrated child credit and the employment tax credit. The reform to support for children aims to unify existing payments in a way that provides a guaranteed stream of income for those with children, whether they are working or not. The credit for people in work will provide an income top-up for low earners - something that those without children have not benefited from before. The government has not announced the impact of the reforms on the public finances, but both will cost the exchequer money, so this Commentary considers the likely sums involved. We also examine whether the reforms look like fulfilling their stated aims: making work pay, relieving poverty and creating a new type of state support that is simpler and less intrusive for claimants.

This commentary discusses the rationale for directing financial support to families with children and assesses options for a new integrated child credit.