Your greed is not good, say Britain and Germany, pointing accusing fingers at thousands of very wealthy clients of LGT, the Liechtenstein bank at the centre of a row over tax havens. But bend your ear and you might just hear, beneath the cries of moral indignation over alleged tax evasion, a compromise - sotto voce. Greed is not good, say Europe's finance ministers, unless we can have 40 per cent.

The state is on the march, in search of ever more cash to oil its creaking machinery. It will even buy stolen property - in this case the client details of thousands of LGT customers, hawked by a thieving employee - if it leads to another treasure trove. Britain invented income tax to pay for the war against Napoleon. Two hundred years on, money is again needed to finance foreign wars, to fund the distribution of bread to the poor and to pay for Olympic circuses that entertain. The hunger of government for more of the national cake is acute and it is becoming a problem.

Last week, the Hundred Group, representing some of Britain's largest companies, revealed more evidence of the encroachment of the dependent sector on the wealth-creating sector. In 2007, corporation tax paid by a sample representing three quarters of the top 100 quoted UK companies increased by 18percent. Over the same period, these companies increased their UK profits by just 7.8percent while inflation was 2.75percent and the British economy expanded by 3percent.

Such a mounting burden on the corporate sector is not sustainable and can only lead to more companies leaving the UK in search of corporate fiscal havens, such as the Republic of Ireland with its 12.5percent corporate tax rate and the Netherlands and Luxembourg with their indulgent holding company regimes.

The underlying problem is the push and pull between competing government interests in tax co-operation and tax competition. The latter keeps tax rates down and whatever you think of the wealthy Liechtenstein depositors, tax havens of the Irish corporate or Monaco jet-set variety are a constant worry for government ministers who want to spend more of our money. Without the competing lure of some neighbouring fiscal paradise, Europe would certainly be a tax hell, a land of disinvestment and unemployment, governed by parasitic states and funded by an overburdened and shrinking middle class. Those with long memories will recollect Britain in the 1970s when the top tax rate was close to 80 per cent.

Competition has brought it down and what has just happened in Liechtenstein is evidence of the tension between tax co-operation and competition. Liechtenstein was a target of the Savings Tax Directive, an initiative led by Frits Bolkestein, a former European Internal Markets Commissioner. Strongly supported by Germany and France, it was an attempt to arrest the endless drain of capital across Europe's internal borders by agreeing to a regime of information exchange about bank deposits. The problem was that even within the EU there was no agreement to end bank secrecy. Luxembourg, another favourite haven for wealthy Germans, was unwilling to agree to a regime of disclosure, so the Commission pushed for the next best option of a withholding tax on income earned by non-resident EU depositors.

Britain protested, fearing that a withholding tax would destroy the eurobond market. Eurobonds were then London's financial flagship, a huge, anonymous and liquid market, much loved by money-launderers. A compulsory levy on eurobond interest would cause the market to flee Britain.

In 2005, EU states agreed a compromise, offering the option of information disclosure or a withholding tax. Neighbouring non-EU tax havens such as Switzerland and Liechtenstein were roped into the fold, promising to remit the levy on investment income from EU depositors to the relevant EU authorities. Still, EU treasuries are not satisfied. The directive is flawed because it targets only individual depositors, not companies, leaving a gaping loophole for those wealthy enough to erect corporate vehicles offshore.

Three years on, the European Commission is planning reforms to the directive, but it won't solve the real problem for EU governments, which remains tax competition.

Unless these “rogue” states agree to impose tax rates of 40-50percent on foreign deposits, they will remain attractive homes to money that moves. There is little incentive for these countries to co-operate - what deal can the EU offer that would compensate for the ruin of their economies? So we can expect more intimidation.

The tax competing mini-states are accused of being havens for drug lords and corrupt dictators, but London has little to be proud of. Sani Abacha, the Nigerian dicatator, used 23 banks in the City to launder his loot, but it was the Swiss authorities, not Britain, that traced the flow of funds in and out of London, naming and shaming financial institutions and freezing assets, eventually returning $458million to Nigeria.

As the global economy begins to slow and corporate profits dry up, governments will look for quick solutions to protect and enlarge the tax base. The Commission will ask for a wider mandate for tax co-operation, holding out the carrot of a bigger pot of revenue. It is the road to economic stagnation, but it will take a brave Chancellor of the Exchequer to resist.

carl.mortished@thetimes.co.uk

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