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This paper incorporates mobility between the legal and black economies into a model of tax evasion with endogenous labor supply, in which underreporting is possible in one sector but is impossible in the other. After applying this framework to various tax evasion scenarios, we have found that the results of the effects along the extensive margin (number of evaders) become more robust and conclusive than those along the intensive margin usually considered by the literature. In particular, it is shown that the following facts reduce the number of evaders: a) Larger and more progressive evasion penalties; b) Higher detection probabilities; c) An increase in the legal sector wage rate; d) A decrease in the moonlighting wage rate; e) Higher costs for creating opportunities to evade; f) Lower opportunities to evade, and g) Greater psychological costs of tax evasion.
When hours of illegal work are also taken into account, policies c), d) and g) continue being valid to reduce total tax evasion, provided that then the sign of the effects along the extensive margin coincides with that of the effects along the intensive margin. The same holds for policies a) and b) in connection with low- and middle-income groups and for policies e) and f) in connection with high-income groups, but not vice-versa given that, in that last case the sign of such effects are contradictory.
