The benefits of federalism derive from the operation of vertical competition … politicians at a given jurisdictional level will assess the performance of governments inhabiting other tiers. If they come to the conclusion that they can do better than these governments, they will act on that conviction.

When tax rights over a tax base are divided among more than one government, the tax base becomes a common property resource … as more independent tax agencies share the same tax base, the standard tragedy of the commons problem emerges and the commons – the tax base – is “over-grazed,” leading to an equilibrium with an excessively high aggregate tax rate, meager aggregate tax collections, deficient provision of public goods, low investment and low output.