(FORTUNE Magazine) – Between now and April 15, millions of Americans will sit down to wage their annual battles with the Internal Revenue Service and their consciences. They will marshal their W-2 forms, bank statements, and canceled checks; organize their records of charitable contributions and medical bills; add up state income taxes, property taxes, and sales taxes; and scan the fine print to make sure they have not missed an allowable deduction. Then, after sleepless nights, they will mail off their sundry forms and supporting documents with silent prayers that they did it correctly. But there are other millions, and I do not mean those who hire accountants or use the short form, for whom April 15 holds little or no terror, no marshaling of legitimate deductions, and no searching of conscience. They are the Americans who make some or all of their income in the underground economy, the subterranean world where there are no checks, no credit cards, and no records of any kind. It is a world that runs on cash, cash, and more cash -- billions of dollars escaping the tax man's net. Who are the participants in this underground economy? Obviously anyone engaged in illegal activities such as drug trafficking and gambling who does not pay taxes on his income is a participant. But the underground economy also includes increasing numbers of people who do honest work ''off the books'' and do not report it to the IRS. These people are cheating honest taxpayers, undermining respect for the income tax system, and eroding national morals. Clearly something must be done. There is no way to make the underground economy disappear anytime soon. But we can do one thing to collect some taxes from it: shift part of the burden of financing government from the income tax to a tax on spending. Everybody spends, so everybody can be made to pay something. No one knows how big the underground economy has grown or how much tax goes unpaid. The American Bar Association has estimated that the U.S. Treasury loses $90 billion a year in taxes to the underground. The IRS, in its most recent study, calculated that 11% of Americans' income went unreported in 1981. Other studies suggest that the underground economy now accounts for 15% of the gross national product, or over half a trillion dollars. And that does not include income from criminal activities. In a perverse way this is good news. It means that America's GNP is much larger than government officials and economists have thought, with fewer people genuinely unemployed than statistics indicate. But the good news stops there. For one thing, the underground economy, by making a mockery of national statistics, calls into question the desirability of all the federal programs based on them. The effects on the tax system are much more important. Ever since withholding began during World War II, salaried workers and wage earners have known to the penny how big a bite income taxes and Social Security take from their incomes before they get their paychecks. Can they be blamed for wondering if the system is fair when so many in the underground economy pay lower taxes or even nothing at all? The temptation to cheat the IRS grows, and so does the underground economy. Americans who prided themselves on their tax compliance may soon be looking back on honesty as a relic of a simpler age. Concern about the underground economy is not new, of course. But most proposals to deal with it have been both bizarre and naive. Some people have thought that changing the size and shape of the $100 bill every two years would help. They theorize that big off-the-books deals are done in $100s, and that if the bills change frequently anyone with a pile of them would have to take them to a bank, thereby creating records, or watch the bills become worthless. Other ideas have included making retailers report large cash transactions as banks do now, increasing the maximum reward for IRS informers from $50,000 to $250,000, and including a question about cash income on the 1040 form. The last idea presumes that some taxpayers would come clean about their underground income if they had to sign a sworn statement about it. Such suggestions are no more than palliatives. Even the hope that a simplified tax system with lower tax brackets would encourage honesty surely is unfounded. The underground economy has become a way of life for millions of Americans. That's not going to change. So where do we go from here? The question is vital to a country grappling with a $200-billion budget deficit and just beginning to address the issue of tax reform. ONE ANSWER is to reevaluate the continued use of the income tax as our principal method of raising federal revenue. There is nothing inherently right or just about an income tax, no necessary connection with a free-market economy, and none with a democratic society. While I am all in favor of a simpler, fairer, and more equitable income tax system, recent events have shown that tax ''reform'' may merely produce a different set of complexities or even make things worse. If we really want a fairer, more equitable way to raise revenue, we need to reach the underground economy. There is only one way to do that. The U.S. should have a national consumption tax. That way, billions of dollars now escaping the IRS will be caught. People working off the books will pay taxes indirectly whenever they spend what they have earned. Another advantage of a consumption tax is that all the arguments pro and con have already been debated extensively. First, a consumption tax would make saving more attractive. The American tax system has penalized savings and investment and encouraged consumption. Even with the savings and investment incentives in the 1981 tax act, Japan and West Germany continue to devote far greater portions of their economic output to capital formation than we do in the U.S. The present House tax-reform bill would reverse many of the incentives in the 1981 act, eventually negating much of the recent gain in productivity. Second, unlike an income tax, a consumption tax would stop at the border. Since it need not be levied on exports, it would not drive up the price of | U.S. goods abroad. It could be levied on imported goods and services, an accepted trade practice under international rules, thus helping to reduce our trade deficit. Third and perhaps most important, a consumption tax could raise substantial amounts of money. A 1% tax on all consumption expenditures would yield around $20 billion a year, a significant contribution to income tax reform and deficit reduction. There are objections, of course, but they can be overcome. If Congress, in a Gramm-Rudman frame of mind, will make genuine efforts to reduce the budget deficit and earmark consumption-tax revenue for this purpose, the extra funds need not trigger a new government spending spree. And a consumption tax need not be unfair to the poor. If we had such a tax, we could afford to remove lower-income groups from the income tax rolls altogether. Or we could exempt certain basic items, like food and low-cost clothing, from the tax. Congress should take up the issue of a consumption tax soon. Once it is in place, all of us mailing our 1040s to the IRS on some future April 15 will feel a little happier. We'll know that at least some fraction of the billions in the underground has accompanied our dollars to the IRS.