Actually I like your implementation more. I hadn't thought about the levelling tree but something including a tall tower to make your capitol stand out from the other cities. Something perhaps upgradeable that is an outward symbol of the might of your kingdom/empire egs the tower of Ecthelion in Minas Tirith or even the Wizards Tower in MoM...

Amarians could have a giant wizard tower, that could add a wizard unit that can maybe cast some spells (increasing in level as city does).
Krax could get a big eastern style fortress with minarets, that would summon a sizeable force of Kraxis defender troops to guard the city.
Ironeers could have a large, growing fortress forge thing, maybe guarded by a few Iron Golems that would defend the city.
Magnar could get a giant Barad-dur style spiky hell fortress that summons demons of various varieties depending on its level.
Mancers could have a large trading palace, like an italian style Doge's villa, that brings in some well equipped mercenary knights to defend.
Men could get a regular ole castle/palace/thing, that would summon some elite pikemen guards to defend the city.
Tarth could get a more primitive, but very defensible looking fortress that would bring out some elite archers to defend the city.
Trogs could have a big building, preferably covered in chains that would unleash a Juggernaut or two on the enemy when the city is attacked.
Urxen could have a big, dark keep (obviously with sinister looking architecture), maybe that adds some extra elite defender units to the garrison.
Wraiths could get a sinister looking mage's tower, maybe with some ice and webs, that would summon an unreasonable amount of spiders.

Anyways, some suggestions...

Yes, I agree with the idea of a capitol city.  many good ideas above ^^^.  Nice!  Perhaps a palace  might also be added... one that also decreases unrest in settlements close to the capitol.  One of the reasons Versailles was ordered built by the king of France was to keep all the nobles close by, and watched... so as to be less likely to revolt.  Just my duo francs

This would explain some of the epiteths, like "The Weaver"

Sovereign: You, you're now hero of the realm, take this sword and head my armies

The Weaver: but, lord, i'm just a weaver, i make carpets

Sovereign: No arguing

The Weaver: But, but, i need to make these carpets for my customers

Sovereign: No buts

The Weaver: "sigh" As you wish my lord.

Ohhh wow, I think I like that idea.

This can be all changed, in fact, I believe one may be able to create a seperate line of upgrades for the capital city as well, and in fact can set it to be unique to the race type. This can be done with the current system of things in the background.