With America’selections less than six weeks away, it is time to think seriously about whatwill be done afterwards to deal with the nation’s fiscal mess. Regardless ofwho wins, addressing the problem can no longer be postponed.

Americans are rightly focused on the “fiscal cliff” looming at the start of 2013, when, under currentlegislation, virtually all tax rates will rise, sucking more than 3% of GDP outof households and businesses. In addition, automatic cuts in governmentspending on defense and non-defense programs will subtractnearly another 1% of GDP in 2013 and similar amounts in future years. TheCongressional Budget Office warns that falling off thefiscal cliff would push America’seconomy into a serious recessionnext year.

And the fiscal cliff is only part of the problem that must be solved. Thebigger problem is that the United  States has an enormous fiscal deficit – nowabout 7% of GDP and predicted to grow rapidly in future decades as an aging population and rising health-care costsincrease government outlays for the“entitlement programs” that benefit middle-class seniors. Although politicianson both the left and the right recognize that these programs’ growth must beslowed to avoid massive deficits or very large tax increases, their growth isunlikely to slow enough to prevent the national debt/GDP ratio from rising.

Fiscal consolidation therefore requires additional revenue as wellas slower growth in entitlement spending. The challenge facing USpoliticians after the election will be to find a politically acceptable way to raise that revenue without undermining incentivesand economic growth. The task is made more complex by the large number oflegislators who insist that the deficit should be reduced by spending cutsalone.

Although no one can be sure how this complex problem will be solved, hereis my best guess: Soon after the election, the US Congress will vote topostpone the fiscal cliff for about six months to allow time to work out anacceptable legislative solution. That solution will involve slowing the growthof Social Security pension benefits for future middle- and upper-income retirees. Mitt Romney, the Republican candidate,has explicitly proposed this, and President Barack Obama indicated support forsuch an approach back in 2009, before he turned his attention to health care.

The tougher problem will be how to raise revenue.The key will be to focus on the many specialfeatures of the tax code that are equivalent to government spending. IfI buy a hybrid car, install a solar panel at my home, or upgrade to a moreefficient water heater, I get a tax credit. And if I buy a bigger home or justincrease the size of my mortgage, I receive a larger deduction that reduces mytaxable income, lowering my tax bill. While the government is not giving memoney, these special targeted tax breaks are noless “government spending” than they would be if the government sent mea check.

These features are rightly called “taxexpenditures,” because they describe thegovernment spending that occurs through the tax code. Eliminating orreducing these tax expenditures should therefore be seen as cutting governmentspending. Although the effect is to raise revenue, that is just an accountingconvention. The fundamental economic effectis to reduce government spending.

So the key to raising revenue is to reduce tax expenditures, use some ofthe resulting revenue to reduce tax rates, and devote the rest to reducingfuture deficits. Opponents of tax increases should see that, because such revenue-raising is really cutting government spending,it does not imply the adverse incentive effects ofraising marginal tax rates.

But even if the intellectual objection to extra revenue can be overcome inthis way, the practical political problem is that every large tax expenditure –the home mortgage interest deduction, the exclusion of employer payments forhealth insurance, etc. – has its ferventdefenders.

So here is an idea that might work politically: Let taxpayers keep all ofthe current tax expenditures, but limit the total amount by which eachtaxpayer can reduce his or her tax liabilityin this way.

I have explored the idea of “capping”the benefit that individuals can get as a percentage of their total income(their “adjusted gross income,” or AGI in US tax parlance).Applying a 2%-of-AGI cap to the total benefit that an individual can receivefrom tax expenditures would have a very powerful effect. It would not limit theamount of deductions and exclusions to 2% of AGI, but rather would limit theresulting tax reduction – that is, the tax benefit – that the individual getsby using all these special features. For someone with a 15% marginal tax rate,a 2%-of-AGI cap would limit total deductions and exclusions to about 13% ofAGI.

Such a cap would have a significant impact on the fiscal outlook. Even ifthe cap were applied only to “itemizeddeductions” and the health-insurance exclusion, it would raise about $250billion in the first year and about $3 trillion over the first decade.

There are many options in designing such a policy. The cap rate could behigher, or it could start higher and be gradually tightened, or it could varywith an individual’s income level. But the economic and politicalattractiveness of a cap consists in its ability to raise substantial revenuewithout eliminating specific tax expenditures.

Fixing America’sfiscal problem will be as difficult as it is important. But slowing the growthof Social Security benefits and capping total tax expenditures would be a goodframework for the coming reform.