The person in example 2 defrauds the government and keeps the tax money for themselves. In an income tax model you are taxed on profits, so choosing to cheat on taxes is a matter of reducing profits.

In a sales tax model you are taxed on revenue, so the cheaters can easily drive the honest people out of business by offering far lower prices.

Quote Originally Posted by DuncanONeil View Post
How does example two not get paid to the Government?

This is a basic misunderstanding of the FairTax as well.