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You don't need to track all cash flow in society to collect taxes. You do need it specifically for personal income tax. If we, say, taxed property and other monopoly rights more extensively instead (in the vein of georgism), such an arrangement wouldn't be so privacy-invasive. It would also mean that those at the top would have to pay more, though - so...

The UAE and Qatar will disagree. Direct taxation is a thing, and is unavoidable (whether you are using crypto or quantum currencies).

Complex taxation that hides where you paid taxes (ie: VAT) or where your taxes went (ie: infrastructure or old persons pension) is what's at risk here.

Arguments over taxation have always led to war, if history is any example… right now people bullish the decentralization narrative are willing to pay taxes to miners/validators/protocols and less so governments.

Eventually this will lead to decentralized warfare with dao's fighting asymmetrically and not playing by the old rules.