I agree that a VAT, sales or consumption tax (call it what you like) is not very plausible at this point. Perhaps it will become more plausble over time through technology.
I don't really agree that it is unfair. The diminishing returns example you use, in my view, is not valid for two reasons. 1. I can 237.4 candy bars before I puke. 2. The whole point of a currency is that it levels the playing field between goods and services. Your 2nd dollar is no less valuable than your first. The products it can acquire may end up having a different mix. You may buy a soda or a stomach pump after you've had you're limit of candy, but it hasn't changed the value of the currency. I'm sure you wouldn't want to cap someone's total assets beacuse dollrs have ceased to have meaning.
There are "unfair" components of any tax system because A) They are designed by people and B ) they are "consumed" by people.
The design of today's code has certainly become broken. The fact that there are so many lines in a tax return and its adjunct forms is proof.
The comsumption of today's tax (and related) system is what tends to bug me the most. Here's an example: Take Mr. Jones and Mr. Smith. Each makes 100k a year in 1986 (right after college) and they get identical raises over time to 150k. Between 1986 and 2004, each has made an aggreagate of 2.25 million (average of 125k per). They both lost their job last month and took 50k positions. By coincidence, each started a family with twins in 86, and each have had identical, medical, income and necessity expenses over the last 18 years.
Mr. Jones likes fast cars, fancy dinners, expensive wine, HDTV, and season tickets to the 50 yard line of the fish (further proof of his stupidity). He decided he could do better in the market than any old 401k plan and he's going to start investing any day now. He's on his 3rd mortgage and has a very low net worth, but he has lived in a huge house since 87.
Mr. Smith started investing right away, lived below his means and has already paid the mortgage on his modest but comfortable house. His only indulgence is seasons to the Bills in the end zone.
Now that the twins are going to go to college, guess what? Mr. Smith has enough to pay their tuition despite his recent job woes. Mr. Jones is ok because his moderate income and lack of assets help him easily qualify for assistance which will be partially paid by Mr. Smith's tax bill.
When it's time to retire, it is probable that Mr. Smith's social security benefits will get hampered by "means testing" while Mr. Jones, who is poor, will receive increased benefits.
Long winded, I know, but my point is that no system can be completely fair without an in depth audit and value judgement of every transaction that every person ever makes. I doubt anyone is in favor of that. We should all be open to any system that closely mirrors its results without undue government oversight. At some levels a consumption tax might be able to do this, at least in theory. Implementation is another matter.