Competitive federalism, government's dual role and the power to tax

Theories of competitive federalism generally focus on exit as the principal mechanism for making governments responsive to the interests of those who are subject to their powers. This paper draws attention to the fact that democratic governments act in two distinguishable roles, as ‘territorial enterprises’ and as ‘club enterprises’. As territorial enterprises they define and enforce the rules and terms that apply to everybody, whether citizen or alien, who resides and/or operates within their jurisdictional boundaries. As club enterprises, they define and enforce the rules and terms of membership in the respective polity. The focus of this paper is on the implications of the fact that ‘exit’ means something different when one looks at governments’ role as territorial enterprises (exit = leaving the territory) in contrast to their role as club enterprises (exit = giving up one's membership status/citizenship).