But it can't be banned! That's the whole point of Bitcoin. (The fact that cryptocurrencies cannot be banned, and the social implications thereof, are explored in A Lodging of Wayfaring Men.)
You know what else can't be banned? Bittorrent. Peer-to-peer filesharing of music and movies.
But P2P networks didn't cause the death of Hollywood. Actors and musicians still show up for work and make movies and albums. (The very same actors and musicians go home at night, go online, and listen to music without paying for it.)
P2P filesharing caused innovation: now we have the iTunes Music Store, we have Spotify, we have Pandora. We have innovated new business models for people to keep making music and movies.
If P2P filesharing didn't destroy music, but rather created Spotify, then Bitcoin won't destroy taxation. What will it create? I have a guess. Let me explain.
First, imagine a world where voting happens through transitive delegation rather than traditional representative democracy. (There are many voting systems. I'm proposing a new one which relies on computing social graphs.)
In traditional representative democracy, one decides independently among a fixed pool of candidates. One votes for one's preferred candidate. This model assumes that one is conversant with the issues. No cheating! Voting booths are designed to keep anyone from peering over our shoulder – and they keep you from peering over anyone else's.
That's fine if you're an educated voter, but educated voters are the exception, not the rule. The fact that most people vote a party ticket shows that most voters don't bother to acquaint themselves with the issues and optimize their vote; they satisfice, so they can get out of the voting booth and go home for a beer.
In fact, I suspect that many voters just call up the friend they know who (a) is more of a politics geek than they are, and (b) they trust to represent them – or at least to resemble them.
Transitive delegation voting acknowledges that reality, and lets you basically hand your vote to your politics-geek friend. That friend collects your vote together with any other delegates, adds it to their own vote, and decides how to pass on the resulting pool of votes. That pool can get split up and handed on, multiple times, like tributaries joining a river, until the votes find their way to someone who decides not to delegate the votes to anybody else, but rather to count them directly in a bid for election. That someone, in the traditional world, would be your Congressman or your Member of Parliament. Here, they're just the root node of a directed acyclic graph – a giant tree, arbitrarily deep. If multiple candidates are vying for the single electoral seat, then the man with the biggest tree wins. (You can implement coalitions this way too, if you want.) And the candidates can at any time drop out of the race and concede their pool to their nominee.
This voting model would not have worked before the Web 2.0 world. Just counting ballots doesn't work in this system. It's fundamentally a social graph, and it needs computers to tell you who won.
Why add all this complexity? Because we're still trying to solve the Bitcoin problem. Bear with me: the votes aren't one-man-one-vote. Rather, they're one-dollar-one-vote. "Dollar voting" has been criticised in the past as an implicit artefact of capitalist democracy. I'd like to make the situation explicit, with a twist: the number of votes you get to cast is equal to the number of dollars you paid in taxes.
In fact, delegating your votes is equivalent to delegating your tax dollars. You put your tax dollars into a system over which you exercise only limited influence. (That's the definition of a tax: if you could choose how to spend it, it wouldn't be a tax: it would be a donation.) If your candidate loses the election, your tax dollars go to the guy who won. So public policy still reflects the will of the majority – and societies still get revenue to pay for public goods – but the process by which we achieve these objectives is a little different from the current setup.
In this world, people have an incentive to pay taxes even if they're using Bitcoin. The more taxes you pay, the more likely it is that your candidate will win, and the more likely that your plan for public spending will be followed, not someone else's. The less you pay, the more likely you won't get your way.
How can societies compel a minimum taxation rate? Easy: everyone could define, as one of the rules of the game, that if you didn't pay a minimum percentage of your audited income, then your vote ratio would suffer a discount: instead of one-dollar-one-vote, you get one-dollar-half-a-vote. Smooth to taste.
That restores all the characteristics of taxation revenue through a voluntary scheme that works with Bitcoin, not against it.
If the Internet begat P2P which induced Spotify, then the Internet begat Bitcoin which may one day induce transitive delegation tax-dollar voting.