"Like Donald Trump, many of the Forbes 400 acquired some or all of their wealth from their parents. These transfers of wealth pass entirely free of income taxes."
The measure of a well-functioning democracy is a tax system that fairly apportions its burdens.
Can blockchain and the inevitable virtual economy make the taxing system less disproportionate?
Transfers of wealth to kids or heirs is not entirely free of income taxes. It's subject to estate taxes which equal 50%+ of the value being transferred. This is precisely why the Trump family had to commit fraud to transfer their father's wealth to the kids. They couldn't even set up a trust that would protect all the assets from probate.
Blockchain can't change or circumvent government tax laws.
Blockchain can enable transaction tracking and transparency. Blockchain make payments incredibly fast and transparent. Blockchain can't ensure that people report their income accurately or truthfully.
Well, that last part is true to some extent, but we also have to realize that even if it brings about transparency and transaction tracking, wallets are not necessarily attached to one single person which makes the idea of not being able to track P2P transactions before they can even say it is going to be taxed will be a hard thing to achieve.
The only way taxation can be effective will be through the exchanges, and just like you said, the chances to even evade tax without reporting your actual income is always going to be there somehow with blockchain and in that case, there would be some limit for the government when it comes to taxation.