It's funny Gideongallery. Earlier you worried about the privacy of people hunted for downloading pirated porn. Now you assume the same people will file their porn addictions on tax forms
I read the theory by Dean Baker. Besides it's 10 years old and based on old prices and technology (hosting and bandwidth is cheap today), the paper is only 8 pages and too simple. Looks like something written by a first year high-school student.
By comparing charity with real business, the hole theoretical model become bogus. It's not going to work in any open economies, and certainly not for adult business.
Few is going to choose the second "privacy option", which is keeping direct payment records for later tax audit. Most people will choose the tax form option, instructing government controlled entities, where to send the money.
Since the first option doesn't need any records, money will often be sent to other creators rather than the ones from which they consumpted. For instance, no one is going to instruct on a tax form to send money to a producer of midget gay bukakke porn. Instead, they will write something else unrelated to porn (or other unrelated themes, because why would anyone share their private interests with the government anyway?).
Besides privacy issues, the biggest bogus here is time. With charity, the concept is mostly to raise money, but real business depends on many other things. Since most will choose the first option of tax deduction, the timeline from consumption to payment can span up to 2 years. This leads to many disadvantages compared to charity:
Humans are humans, no matter the digital technology. Most people can't remember everything they consumed longer time ago, and certainly not details like name of creators.
A business can not wait too long for their money and statistics. Long term uncertainty about their economic situation and market position does not work for business models that need to react fast.
The model also open up for excessive fraud. Copyright protection today is not only granted to the 500,000 suggested, but
everyone who publish any of their own creations on internet. Anyone can simply take one picture of the sky and place it "for sale", then anyone can also deduct money given to themselves.
The only way to prevent this kind of fraud, is for the government to evaluate and control content. And that is not "free internet", right?