The following comes directly from The FairTax FAQ. I have underlined the portion which shows you to be in error on this point.
Tax criminals - don't make criminals out of honest taxpayers.
Today, the IRS will admit to 25 percent noncompliance with the code. FairTax.org will be generous and simply take the position that this is likely a conservative estimate of the underground economy. However, this does not take into account the criminal/drug/porn economy, which equally conservative estimates put at one trillion dollars of untaxed activity. The FairTax does tax this - criminals love to flash that cash at retail - while continuing to provide the federal penalties so effective in bringing such miscreants to justice. The substantial decrease in points of compliance - from every wage earner, investor, and retiree, down to only retailers - also allows enforcement to concentrate on following the money to criminal activity, rather than making potential criminals out of every taxpayer struggling to decipher the current code.
Again it's simply a trade off. Every legal dollar that enters the underground was taxed before it was sent underground by a legal income earner executing an illegal transaction. That dollar is not taxed again until it resurfaces out of the underground in a legal purchase. There it flows in a largely tax free transaction to a legal recipient. The dollar is taxed exactly once. Because the tax is levied on income, the illegal activity is biased to avoid legal income transactions of both legal (garden services) and illegal activity (drug deals.) Dollars go underground in order the purchase discount legal products or illegal products.
Under the FairTax every legal dollar that enters the underground is NOT taxed before it was sent underground by a legal income earner executing an illegal transaction. That dollar is not taxed until it resurfaces out of the underground in a legal purchase. There it flows to a legal recipient, who will collect tax on the legal transaction. The dollar is taxed exactly once. Because the tax is levied on purchase transactions, any illegal activity is biased to avoid legal purchase transactions of both legal (garden services) and illegal activity (drug deals.) Dollars go underground in order the purchase discount legal products or illegal products.
There's no difference. Illegal activity is not taxed in either scheme. The dollar is taxed exactly once. There remains a bias to go underground (but the bias shifts from avoiding taxable income to avoiding taxable purchases. No new activity is captured.