A Note on the Interplay of Vertical and Horizontal Fiscal Externalities

We generalize a result due to Karakosta and Kotsogiannis (2006) who showed in a two country model with imperfect competition, linear technologies and product market taxation that the horizontal externality effect dominate the vertical one (i.e. that local taxes are too low) if and only if at the multi layer tax equilibrium, the marginal welfare of the local public goods is higher than the one of the federal public good. We show in a simple proof that this result generalize to any number of country, firms, any technologies and any kind of taxation.