The dissertation collects three theoretical essays which zoom in on the drawbacks as well as advantages of decentralised taxation in a federal context. The first essay studies the combined effect of vertical and horizontal tax competition, and finds the interaction between both types of externalities is more ambiguous than commonly understood. As a result, fiscal equalisation mechanisms fail to fully uphold efficiency. In a second essay, the soft budget constraint problem is analysed, where lower-level governments over-borrow because they expect a bailout from the federal government if needed. Explicitly modelling federal elections, the model sheds light on the logrolling and favour trading of regionally elected politicians in a federal coalition, which leads to more over-borrowing by the regions. The last essay investigates the feedback loop between decentralised tax autonomy and local growth-enhancing policies, which is self-reinforcing due to the fiscal incentives of politicians to attract additional revenues. Given a certain degree of decentralised public functions, expanding local tax autonomy is shown to unambiguously boost voter welfare in this context.