Treasury minister David Gauke has said it is "morally wrong" to pay tradesmen in cash, in the hope of avoiding tax.
Government estimates put the amount of VAT and income tax revenue lost to the black economy each year at more than £2bn.
Gauke told the BBC's Newsnight: "When a tradesman says: ‘Here's a 10%, a 20% discount on your bill if you pay me cash in hand' that is facilitating the hidden economy.
"That's as big a problem in terms of loss to the Exchequer as tax avoidance. Revenue is not being paid as it should be paid."
He added: "Getting a discount with your plumber by paying cash in hand is something that is a big cost to the revenue and means others have to pay more in tax.
"I think it is morally wrong. It is illegal for the plumber but it is pretty implicit in those circumstances that there is a reason why there is a discount for cash."
His remarks were criticised by Labour. Austin Mitchell, who also sits in the Public Accounts Committee, said the issue was "petty".
"There would have to be large-scale surveillance to stop it," he said. "You can't control people's morals like this and it is best not to try."
‘Promising lead’ or ‘Back to the lab’?
Have economic cycles fundamentally changed?
Our weekly heads-up for advisers
Two global vehicles
'Further plug advice gap'