The usual argument in favor of taxing income rather than consumption is that consumption is more elastic than earnings. Although this is the predominant view (supported by studies like: Brookings Paper on Macroeconomics), there is evidence to the contrary.
In the Wikipedia article Wealth elasticity of demand, the author notes that consumption didn’t change substantially after the April 2000 stock market crash (where US$2.1T in investor wealth was wiped out).
On a smaller scale (and admittedly less statistically significant), the Tax Foundation article Delaware Hits the Tax Jackpot shows huge year to year variability in Delaware’s corporate income tax revenue from 1988 to 2007.
If incomes are variable from year to year and consumption is relatively inelastic even in the face of significant declines in wealth, can governments still reasonably justify income based tax policy by rationalizing that incomes are less elastic than consumption? I suspect the explanation is rooted in inertia - if you can find any evidence to support the status quo, why tinker with it?
Perhaps a more disturbing effect is that inflation pushes apparent wages higher while real wages remain static or actually decline. In The Labor Shortage Hoax, Alan Tonelson discusses outsourcing and the labor shortage myth. No less interesting, he drops the little known fact that real wages peaked in 1978 and have declined since then. His prediction is that wages, even high tech wages will continue their inexorable decline.
So incomes are far from inelastic, they’ve been declining for three decades and are expected to continue doing so for the foreseeable future as the Phillippines, Russia, and Vietnam get a taste of future U.S. outsourcing.
Further (slightly off-topic) reading…
Debunking the Myth of a Desperate Software Labor Shortage a 1998 position paper by Normal Matloff at U.C. Davis.