This plan is no good, because the Palestinians already say they want more territory than Israel is offering them at most, and because, by making the losses permanent, decreases the chances for peace in the future.
A better solution would simply be to continue to build new settlements (And displace Palestinians) with every terrorist attack. If it takes 100 years for Israel to retake the Palestinian areas, then so be it. But--in order give an incentive to make peace--offer that if the Palestinian government made real progress in cracking down on the terrorists, that ALL of the settlements would be returned. And then, if the Palestinians can be peaceful for at least ten years, they could see about giving up East Jerusalem to be the Palestinians' capital.
The problem with the current peace proposals is that they're stupid. Why should Israel surrender REAL territory BEFORE the Palestinians deliver any of their promises? That was the spirit of the Oslo Accords, and that's why they failed.