Answer to Question 1
Intergovernmental competition gives individuals a variety of governments to choose from. By moving from one government to another they can choose from among different bundles of local public goods. Intergovernmental competition also facilitates comparisons among local governments, giving citizens a way to compare the performance of their own governments by giving a benchmark of quality. The benefits associated with intergovernmental competition do not disappear if mobility is limited because individuals can still compare their own governments to nearby governments.
Answer to Question 2
Inflation interacts with tax revenues because if tax brackets are not indexed for inflation, then nominal increases in income due to inflation will lead to real tax increases as individuals are pushed into higher tax brackets. The indexing of tax brackets in 1982 eliminated most of the negative effects of inflation on taxes, but not all. That is because not all features of the tax code have been indexed for inflation, merely the tax brackets. For example, capital gains are based on nominal increases in the price of the asset sold, so inflation has the impact of increasing real taxes on capital gains without a vote by Congress.
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