Thanks all for the great comments. I think this discussion is health and I've made some additions to the post to reflect some of your suggestions.

Also, to clarify my position: I am not at all suggesting that the Taxonomy module be taken out of core or that development be abandoned. And I'm sure that there are some very specific use cases where it is essential.

What I am suggesting is that we as site builders and developers not make a knee-jerk decision to use Taxonomy just because it's there and we've "always done it that way". There are other more elegant ways to accomplish a task that may in turn push us to improve the Taxonomy module.

@Alex Weber & @Mikkel Hogh, Since taxonomies are now fieldable in D7 and are essentially entities just like nodes, I'm not sure if there is much of an overhead difference. Maybe someone more familiar with their underpinnings could comment. I've found it an advantage to have the terms as nodes in many situations. Although I can also think of some situations where I wouldn't want those nodes navigable.

@Mikkel Hogh, despite questioning my "Drupal proficiency" :-), you make a great point about the historical significance of Taxonomy. Thanks for bringing that up. I think it deserves consideration when someone it deciding whether or not to use Taxonomy.

@gaus: Nice module suggestion!

@James Oakley: Lot's of patience! If you've already headed down the Taxonomy road, you might consider just staying on that path unless there is some serious roadblock that is preventing the project from moving forward.

@matslats: Excellent points! We should all consider these when deciding when and how to use Taxonomy or not. To reiterate my position: Taxonomy should remain in core and continue to improve (as it did in D7) but we should consider other approaches before using a module that is overused for every kind of tagging and categorization despite not being ideal for every situation.