In principle, I do not think the income tax should be replaced by anything at all. Most federal spending is either unnecessary or actively harmful. But practically speaking, I'd suggest a federal sales tax combined with a Universal Basic Income subsidy to all citizens (e.g., everyone gets a check for $X every month). The subsidy would cover the increase in prices for anyone below a certain income level - it would effectively produce a progressive tax structure without the privacy infringement. There would be no loopholes or exemptions to think about either.