There's no particular reason Bitcoin is incompatible with VAT-style tax systems. Think about inverting the situation.

Right now discounts for paying in cash is obviously a tempting deal for both parties because the buyer has no particular incentive to help the tax man.

The government could provide a rebate for reporting transactions to it. This is too much hassle for people to do today, so they rely on tapping the banking network to view transactions. But if you have open source clients and an automated, open payments system like Bitcoin nothing stops you having software that automatically reports things you purchased to the tax authorities who then effectively "cut you in" on the resultant tax take.

Alternatively, businesses are required to register the root public deterministic key, so the tax collectors can generate all the public keys that the business will be using. Random audits and/or micro-payments to consumers for reporting transactions mean the collectors can cross-check against the public addresses. If a business requests payment to an address that isn't derived from the right root key, it's obvious they are not reporting all their income.

It's not clear to me that our current tax system (in the UK) is the best way to do things, carousel fraud is a fairly obvious problem, but I feel that with further research a country could come up with a remarkably efficient and fair tax collection system that leverages Bitcoins strengths.