A concept to redefine the internet

If I'm understanding this right, it would require every router to effectively be a proxy... it's tcp but with every packet masqueraded.

Honestly, hard pass. Knowing the source IP (i.e. where things are actually destined) is useful information for network reliability and performance. It's part of what makes the Internet so reliable, self healing, and snappy.

It's also still important to be able to just say "no I don't want anymore traffic from this machine." IP bans can be used to protect more expensive processing power from misbehaving systems. I don't want to block an entire state (or literally everyone) because one machine was misbehaving (if you can only see one node back, you can only block that one node which is now responsible for all traffic).

This wouldn't even provide privacy from the kinds of folks (governments) that I'd assume you're trying to protect from. They'd still be able to setup a surveillance network inside of ISPs to watch the exchange from A -> B -> C and back. The reason Tor works so well is it's anarchy, anyone becomes an ISP node despite their status on the physical network. There becomes too much to backdoor and too much to watch (without spending billions or trillions to gain a majority share of the Tor nodes worldwide).