RE: Whats wrong with this header tank setup???
Since installing the header, have you tried going back to the main tank? If the engine runs fine on the main tank (as before) then the problem is in the header tank set up. If you find that the engine runs crappy on the main tank, you need to look at the throttle needle settings again, particularly the low speed needle. Try richening the low speed needle.
This may sound like a stupid question but is the header tank filling up when you run the engine? Have you checked to make sure that the filter you're using isn't plugged?
Also, the header is at the same level as the main tank which, it appears to me, would not gain you any benefit. As suggested, I'd set the header tank so that the middle of the tank is about in line with the needle valve.
Finally, is the header tank open to atmosphere? That is, it it vented, is the third nipple open?