[mmichaels1970]

My neighbor is a mechanic and does repair work for friends and acquaintances on the side. Cash only. He fabricates parts which adds value to the raw materials. Cash only again. No reporting of the value added or the labor. Would not an excessive consumption tax lead to more "underground economy" operations?

I would guess your neighbor is already "underground" right? I would guess he's not declaring the cash on his income taxes. So in this case, you'd have a wash in the underground economy. The income tax dodgers become sales tax dodgers.

The good thing, however, is that your neighbor is going to take the $200 cash down to AutoZone to pick up some cool new tools for his garage. So at least eventually that $200 ends up with a tax on it.

[chimera]

Its true that in this example all of the activity is not “underground” as you just have to buy (at retail) certain things and raw materials. But, in this case, he does do a lot of things to minimize or completely avoid those taxes (mail order, buying out of state in lower-tax places, etc.). Those places aren't zero in terms of tax burden, but there are places you can do business were local and state taxes are lower, or (for local taxes). essentially zero.