Is it ethical that illegal money-making be legally taxed?
Today's example is Al Capone. They couldn't get him on his criminal activity, so they convicted him on tax evasion. Capone's income was based largely, if not wholly, from illegal activity.
The question, simply put, is: Doesn't the expectation of legal taxes give legitimacy to the actions that produced the income?
I would almost consider the expectation of taxes on illegal money to be a violation of the 5th Amendment's prohibition of forcing a person to bear witness against oneself. If the person did file and pay taxes on illegally gained money, that's essentially what they'd be doing. The tax form would not be unlike a person committing a crime and posting a picture of it on Facebook, the difference being that the Facebook photo was completely voluntary whereas the tax form was coerced/mandated.
How can the government... ethically... play both sides of the fence?
(The fact that they can and do get away with it is indisputable.)