Although I agree with the ideology, I can not believe it will end government. As much as people bitch and complain about government, I sincerely believe that 99% of people couldn't live without it.
Bitcoin will - and indeed does - allow for a much more private way of doing transactions online. Like using cash in the real world.
The problem is, the government needs the tax money. Depending on your country, some products are taxed many many times before you even pick it up in the store. Raw materials, refined materials, labour, etc etc.. every step of the way, tax is collected. The upshot is, if they believe revenue is going down at one level (ie. the consumers are buying products with anonymous currency and not paying appropriate taxes) then they will simply raise the tax at an earlier level, and make the end good more expensive. Or raise income tax, or land tax. It's not a battle that can be won by subversion, but actual active political change. </end soapbox rant, heh>
I do think it sends a strong message however, and the long term response will be very interesting. ie. Paypal immediately freezing accounts known to be doing currency exchanges.