In the week of the national budget, the effect of tax rates on London's role as global city remains salient. It is often not appreciated that Middle Eastern capital discovered London as safe centre only as recently as the 1970s.

What has been built in thirty or so years could be unravelled in three. The terms and conditions surrounding the domicile of international interests in London are a material factor in assessing the long term prospects for national economic growth.

Yahoo is not the fund of some regional potentate but is a leading-edge company in the latest economic revolution, that of information. It has now indicated that it will move its European HQ from London to Geneva. Its managers will be told to relocate or be fired and the reason being given is change in the corporate tax regime.

Nor is this an isolated incident. Google chose to base its European engineering HQ in Zurich and Electronic Arts moved its European HQ to Geneva in 2006. The irony is that leading companies in the new information sector are basing their European operations in a non-EU state.

This must raise a serious question whether it is really in the UK national interest to equalize its tax rates with Europe (as increasingly pressed to do so by the EU) and go with the implicit campaign to raise rather than lower international corporate taxation.

There is an alternative strategy which is to go it alone, like Switzerland, and preserve an international trading base, one that is beginning to drift overseas far more than Government realizes.

Any trend towards the shift of corporate headquarters from any EU state to a non-EU state within EU borders raises the ante for core Europe (which is essentially the growing German ‘sphere of influence' operating alongside its French junior partner).

It affects the core German commitment [under Chancellor Merkel] to enforce a single regulatory framework that can be negotiated on equal terms with the US to create a single pan-Atlantic/European market.

This hard-line liberal or Atlanticist perspective is one shared by much liberal internationalist opinion in London. It sets these ideologues into a direct conflict with 'national interest' and City ideologues, along lines that are increasingly splitting the British political class along their traditional party fault-lines and setting trades unions off against the 'City'.

It may mean that, having ‘blitzkrieged’ Liechtenstein into near-submission, the German and Euro-liberal impulse will be towards ensuring that ‘something must be done’ about Switzerland or else the European tax base will be undercut and European innovation will drift ever further from its core to its margins.

Like all wars, economic as much as military, the temptation must be to see the first action as merely preliminary to a second and a third and so on until, like the Romans and the British, you discover you have a acquired an unwieldy and costly empire - or have to retreat in the winter snows from Borodino or Stalingrad.

The UK Government is probably less concerned with theory at this time and more with the short term necessity of getting cash-in-bank.

This week's budget was largely touted as one of ‘stability’, meaning that it was a politically sufficient shuffling of the tax cards in which socially responsible cover (green and anti-alcohol) was given to some fairly uninspiring attempts to deal with child and pensioner poverty.

But the message from Labour's trades union backers is clear - the Government must start generating cash for redistributive purposes regardless of the economic slow-down.

Logically, the only way to do that is through increasing taxation and, as we will note, the trades union interest in the US, the EU and the UK is becoming a major pillar of the coalition to insert a tough regulatory framework over free capital.

The real story of the British Government's economic policy recently remains one of over-expenditure because of silly imperial adventuring, of a pro-migration strategy whose raison d’etre has collapsed as growth slows and of a benefits systems that is out of control and still unreformed.

The impossibility of persuading the public to pay any more direct tax is the back-drop to what are called stealth taxes (always requiring some 'feel good' cover as they are introduced).

Targeting the tax-evading corporation and wealthy individual is probably all that is left in the cupboard because attempts to brow-beat energy corporations to comply with the government's brief attempt at arbitrary action signally failed in the run-up to the Budget Speech.

The farrago over non-domicile taxation, with a partial withdrawal by the Government from its previous high ground, and widespread criticism of increased corporation tax for smaller businesses means that the Government cannot go much further down these routes without risking the next election.

In a pale reflection of the current German campaign against tax evasion, the HMRC are mounting their own increasing propaganda operations to prepare the ground for more action in the coming months and years.

The latest figures, which are admitted not to be particularly reliable by the nature of things, suggest that Britons are hiding £1.5bn per annum and that most of the £80bn stashed offshore in 2005 was held in the Channel Islands and the Isle of Man.

We are getting clues to future trends. First, that the really clever and 'big' money with no real allegiance to Europe will be moving out of area and into East Asian boltholes quite soon and, second, that the smaller tax havens of the British Isles are no longer under the protection of the Crown in relation to longstanding European-wide demands that they be brought to heel.

Governments have an in-built propensity to exaggerate unknown figures in the direction of ensuring political support but, noting a range of tax evasion estimates that may mean the sums are actually closer to £800-900 million per annum, this is still a substantial sum.

The order of villainy is also the probable order of UK and EU targeting – the Channel Islands and Switzerland first and the Cayman Islands, Isle of Man, Singapore, Hong King, Bahamas and Luxembourg second.

The politics of this are interesting and worth reviewing. We have noted that, whether in the US, UK or EU, there is a very close relationship between state agencies and the trades unions in propagandizing directly and through political allies for a tougher line on tax evasion.

The state interest is simply institutional. Alternative sources of capital are a threat to authority.  Whether the tax funds are to be spent on guns (improved military capacity) or butter (welfare) is a matter of irrelevance.

For the trades unions, the assumption is that increased tax take will be spent on social service benefits and on job preservation and protection. This money is now needed quickly to counter the effects on members of recession today and liberalisation tomorrow.

The bureaucratic impulse towards power in itself and the social democratic impulse towards service provision are allied but not identical. Whereas the trades unions are merely slowing down the demise of welfarism, the real purpose of the campaign against tax havens is centred on state formation (predominant in the EU) and security (predominant in the US).

The need to increase the tax take from the wealthy and the non-innovative corporate sector is partly to enable the necessary transitional ‘bribes’ to the trades union and centre-left establishment that will ensure their engagement with an essentially liberal and bureaucratic project.

The irony that it is the most innovative companies that are moving to more favourable tax regimes like Switzerland suggests that the reasoning behind recent measures is flawed and that there is really no sustainable ‘third way’ between the social democratic state and the free market.

Unfortunately, so much investment has been placed in the New Democrat model imported from the US in the early 1990s that a reversal of policy in this respect is effectively an admission of political defeat by an entire generation of the centre-left.

This is a fascinating time. Absolute free market ideology and classical socialism are becoming or have been fully discredited (not necessarily intellectually, but politically within the elites of the West). There are now new and competing ways of dealing with Western responses to globalization and we have to draw a distinction between means and ends.

The shared ends are a strengthening of (allegedly democratic but in fact corporatist) state power, whether as federalized mega-states such as the US, EU and (conceivably) Russia or as executive states within the mega-states.

These executive nation states are more sovereign in the EU case than the equivalent US state but are probably destined to be no more so within a few decades of consolidation.

Everyone who is involved in these projects – whether bureaucratic, large business and organized centre-left – are studiously avoiding any discussion of what these mega-states and strengthened national states are actually for and how the money from increased tax take should be spent.

All that they are currently agreed upon is that money for bureaucratic and political use must be increased and that independent and unaccountable centres of capital accumulation operating outside state or 'imperial' regulatory structures are intrinsically anarchic and politically dangerous.

The next phase is a rush, post-Nice in Europe but with significant US support, for the implementation of a wider regulatory regime in which every independent source of capital within the West's sphere of influence is brought under the ultimate authority of a highly technocratic liberal state structure. Once this is over, then the cash gets divvied out.

This is where it gets interesting. The logic should be of a corporatist understanding not unlike Germany between 1934 and 1938, but with full liberal democratic forms, or Scandinavia under social democracy. Worker requirements for jobs and benefits would be protected in order to give a domestic base for whatever security and economic strategy is deemed necessary by executive power.

We have an open mind on just how foolish and aggressive or passive such strategies may turn out to be. The growth of anti-Islamic sentiment in core Europe and anti-Russian sentiment in Eastern Europe suggests caution in assuming that, for example, the EU is going to be any less peaceful than the US in its long term conduct.

But another possibility is that the ‘security state’ becomes committed to liberal economics to such an extent that it clashes directly with the social democratic impulse behind trades union support for its growth and development.

This is the real battleground once the state consolidation phase is completed. The bureaucratic order may yet place order and stability ahead of economic liberty and economic growth and this is an argument that has yet to work its way through the system to a conclusion.

The probability is that a weakened corporatist model will hold, with the trades unions as junior partner in the domestic ‘coalition’ much as France is junior partner to Germany internationally.

A sort of faux-social democracy will emerge in which regulation and corporatism creates a sufficient simulacrum of a free market and of democracy that most people will find it acceptable – much as Indians accepted British rule and other subject races accepted Roman rule – until the system breaks down on ‘internal contradictions’. Yet such a state could last for decades or centuries.

In the short term, we can reasonably predict that OECD pressure on independent centres of capital accumulation, on tax evasion and on collusion against the 'public interest' will intensify to irresistable levels over the next few years.

Because the West cannot put up barriers (for ideological reasons) that would isolate itself from globalization, we will see the same type of boundary formation in economic affairs that we are seeing in political affairs (vide Kosovo).

Small countries and ‘city-states’ like Switzerland and the City of London may have to accept a de facto weakening of their independent competitiveness in order to participate in what will be claimed to be the greater opportunities offered by federal integration. Eventually, boundary formation must reach its natural limits.

At one extreme, the British national interest under a Tory Government might dictate that the UK renegotiates its status with the EU and becomes, like a determined Norway and Switzerland, itself the economic boundary.

This scares EU bureaucrats because it creates the pre-conditions for future detachments such as Denmark and for opportunities for Russia to make ‘improved bids’ for Balkans aspirants to join their sphere of influence.

But it also helps to explain why the pro-Western (in the ideological sense) Brown Government determinedly used the whip to ensure that there would be no referendum and no public debate on a policy which would set the heartland English dead-set against great tracts of the New Labour coalition.

At the other extreme, countries like the UK and Switzerland, on either side of the current economic border, might become fully tamed and integrated. Western ambitions would then turn to bringing the emerging world and Russia into line as a condition for doing business with an integrated West.

When Lex in the FT today (wroting on this week's House of Lords' ruling on extradition) writes that “finally someone has put limits on US prosecutors’ efforts to police the world …” he or she is not complaining about policing the world, only about the attempt by the US to dominate the process. Liberal pro-Europeans are merely resentful of US Manifest Destiny. 

What Euro-liberals want is joint US-European negotiations of the rules by which the West will conduct itself and, eventually, joint policing of the world because Western (not US) values are so evidently superior. Euro-liberals are merely resentful that the US operates according to American national interest instead of that of this thing called the West.

The eventual reality will lie probably somewhere between the two extreme models reviewed above, with tolerance of some border freedoms and acceptance that the Middle East and East Asia will always offer opportunities for the non-repatriation of serious amounts of extra-European cash until world government comes.

In other words, the hard-line Euro-liberals are going to be rather frustrated that social democratic demands mean that full integration with North America will always be a matter of stealth and domestic bribes, while the need to keep Euro-corporatism within the family will mean irritating compromises that work against 'world government' thinking. Such is life!

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