Drug deals would not be taxed under a sales tax. There is no way a drug dealer will declare his sales and remit the tax.
Proponents claim that the drug dealer pays the tax when he buys a car. This is irrelevant. The car purchase is a legitimate transaction. As with all legitimate transactions, car purchases are taxed under either system.
Noone has explained to me how sales taxes capture the underground economy. Please identify one transaction that the sales tax would capture that the income tax does not.
Partially correct.
The drug dealer is effectively a retail business. Since he does not report sales, his customers do not pay sales tax on his products. However, if his raw materials were obtained at retail, the tax is embedded in his costs. If they were smuggled or illegally produced, they would be tax free. So that portion of consumption (by the end user) is evaded.
When the drug dealer spends his profits, he will pay tax on his consumption.
Is the plan perfect - no. Does it eliminate tax evasion - no. Is it better than what we have now - YES.
Just for starters, it reduces the number of taxpayers to audit by 90%. And about 20% of those generate about 80% of retail sales volume. If some smaller ones slip through the cracks, it's OK. I would expect the tax collection gap to be significantly less than today.
Most people are honest and willing to pay their fair share if they feel their neighbors are paying theirs. When people start looking for ways to cheat is when they think they are getting stuck with the bill that everyone else is avoiding.