Taxes work because enough companies and individuals pay them voluntarily that the cheaters can be cross-checked into oblivion.
Taxes work because people like me - highly-paid middle-class employees - find them almost impossible to dodge. Everyone else is the fluff on the side - it's PAYE (pay-as-you-earn, where taxes are withheld from your earnings) employees who are the backbone of government revenue. And, increasingly, sales taxes. In both cases, the pressure point is businesses, of which there are far fewer than there are citizens.
I hadn't seen that term, so for others who were in my position,
PAYE = Pay as you earn (presumably payroll taxes)
Tangential, but a subject of some local interest:
Why Bitcoin will fail by Avery Pennarun. "The sky isn't red." Thesis:
I'm not sure I buy these and am not competent to evaluate his claims on 3., but would like others' critique.
L019: Bitcoin P2P Currency: The Most Dangerous Project We've Ever Seen by Jason Calacanis. A rather more enthusiastic viewpoint of the project:
The actual text contains many more caveats than the eye-catching selection of points above.