I think going completely kayfabe, with these two, is nearly impossible. Both are tough guys who would engage in a terrific battle, an epic encounter. Both guys are extremely resilient, with a will to win that is almost unmatched. So the only way for me to look at this is by judging based upon past encounters, and Austin wins. Austin has more clean wins over Taker in one-on-one matches, so that's my reference point. I just can't see any reason to vote for Taker over Austin.
While I can see some reasons to vote for Taker, I largely agree with this right here. In terms of kayfabe, tournament or not, Austin should, could, and would beat Taker.
However, for the sake of argument, I would have to give Taker a chance. In a tournament setting such as this, where the damage that both have taken thus far is a critical factor (yet very subjective), how one analyzes the prior matchups could be the deciding way to vote. Taker has gone through HBK and John Cena, while Austin has been through Jericho and Flair. All four of their opponents are very capable of dishing out damage that would likely carry over to this matchup, and both Austin and Taker are capable of withstanding a ton of abuse before being put down.
I see Austin coming into this round with a disadvantage. That is my opinion, sure, but he is coming off rounds where two guys have (likely) repeatedly put his legs through stressful submission moves. Austin has bad legs anyway, and this can't go in his favor. Sure, I don't think Jericho did as much damage to Austin as Cena did to Taker, but I would think Austin/Flair took a toll on Austin's legs, and that should be a factor here.
On the flip side, Taker should be gassed. We know what Michaels (on the verge of retirement) was capable of putting Taker through, and though Taker was able to win, he really fought a battle. Cena is a Hogan-esque figure that takes forever to put away, and while he doesn't really pick apart a body part, he surely took a toll on Taker's energy.
So, I've got Taker coming in gassed and Austin coming in with battered legs. Even with a near empty tank, Taker is a pain in the ass to put down. Michaels took him to the "limit" two years in a row, but ultimately failed anyway. Austin, while he does and has had Taker's number, isn't exactly fresh here, but I don't see Taker using anything that would capitalize off of Austin's injuries. This match would likely be a war, with both beating the crap out of each other.
In the end, I think I'd go with Austin winning. Even with Taker coming in with a slight edge, Austin is one of the guys that has consistently found ways to keep Taker down for 3. I think that is the most important thing to look at when voting in this matchup. If Taker were coming in fresh against this Austin, then yes, Taker would win, but I'm looking at the Taker that has just beaten Michaels at WM 26, only weaker. Austin, even in a weakened state, can beat that Taker, and he will here, at least in my eyes.
My vote goes to Stone Cold Steve Austin.