There is a broad bipartisan consensus that the long-term fiscal policies of the United States are unsustainable. The CBO projects that the January 2013 fiscal cliff tax deal will triple our deficits over the next 10 years, relative to what deficits would have been had all the 2001-03 tax cuts expired.

To a surprising extent, our adverse budget deficit picture over the next decade is the result of forgone tax revenues. As a result of the Great Recession, we lost about $2 trillion in revenue over the last few years, relative to our historic rate of tax collections as a percentage of GDP. Looking ahead, the fiscal cliff tax deal will reduce future tax revenues by $4 trillion, relative to what CBO had projected under its 2012 baseline. Together, these past and future forgone revenues amount to a roughly $7 trillion contribution to our deficits from 2008 – 2023 (including interest costs on increased borrowings). To a large extent, both sequestration and the budget caps of the 2011 Budget Control Act are efforts to recoup on the spending side monies that were forgone from the revenue side.

There is no short-term crisis in financing the national debt; Treasury borrowing rates are at near-record lows. Nor is there a general crisis in the availability or cost of capital for the private sector. The short-term crisis is about jobs; the CBO projects that 2014 will be the first time since the Great Depression that unemployment remains over 7.5 percent for six consecutive years. But deficit reduction through eliminating wasteful tax expenditures can offer little short-term help here.

The long-term problem is entitlements spending, particularly spending on healthcare. For that matter, healthcare is our biggest immediate spending problem as well. The United States today spends much more on healthcare (public and private) per capita than does any other developed economy in the world. If the United States were to expend per capita what Norway (the second place country) does on healthcare, our aggregate healthcare spending (public and private) would immediately decline by some $880 billion/year.

While long-term entitlement spending reform is critical, we must “boil the frog slowly,” to borrow a phrase from Senate Finance Committee Chairman Baucus. Both our citizens’ expectations and our healthcare delivery institutions are built around current policies. Change must follow a predictable path that starts in the near future, phases in slowly, and comes to rest with new institutions that will serve the needs of Americans for decades to come. The requirement that we boil the frog slowly in turn has important implications for tax revenues over the medium term.

Defense discretionary spending is the other great outlier in U.S. government spending policies. By one estimate, the United States spends as much on its military as do the next 14 countries combined – 41 percent of the entire world’s military expenditures.

Current levels of nondefense discretionary spending are modest by world norms. This “spending” includes some items, like infrastructure, that are bona fide investments with long-term economic benefits. And both defense and nondefense discretionary spending already are on downward paths to reach their lowest levels in 50 years. This unrealistically aggressive assumption is baked into the CBO’s 2013 deficit projections.

The number of Americans age 65 or older will increase by more than 1/3 over the next 10 years. This has obvious implications for healthcare, social security and other government spending programs.

All these points imply that spending cuts cannot by themselves fund all of our deficit reduction requirements in the medium term. Whatever the long-term world we transition to, we will need to finance the costs of getting there, and that in turns means higher tax revenues than those we currently collect.

The United States is an extraordinarily low-taxed country by world norms – in fact, in 2012 we were the lowest taxed country in the OECD, as a percentage of GDP. And even by our own standards we have been collecting historically low levels of tax. This level of revenues cannot be reconciled with our outsized spending on healthcare and defense, and our rapidly aging population.

By all measures, the United States can afford to increase the total taxes it collects as a fraction of GDP. Just a decade ago, the country ran budget surpluses and enjoyed both a robust economy and job growth, while tax collections exceeded 20 percent of GDP.

We therefore have no practical choice but to raise the level of tax collections in the medium term to the range of 21 percent of GDP, rather than the 19 percent figure projected by the 2013 CBO baseline.

Economists prefer to raise additional tax revenues, when necessary, through broadening the tax base, rather than raising marginal rates. Unlike 1986, when the tax system overflowed with unintended tax shelters that could be cleaned up and traded off against lower rates, this means directly tackling some of the deliberate Congressional subsidy programs baked into the tax code, which is to say, tax expenditures.

Of all current law’s tax expenditures, the most important to address in tax reform are the personal itemized deductions, such as the deductions for home mortgage interest, charitable contributions and state and local taxes. They are extraordinarily costly subsidies – about $250 billion/year in forgone tax revenues. They are inefficient, in that they lead to major misallocations of economic resources, particularly with respect to housing. They are poorly targeted, in that the government subsidies go to individuals who would have behaved the same without the subsidies. And they are unfair, in that they are “upside down” subsidies – they subsidize high-income Americans more than low-income ones.

I recommend that we replace the personal itemized deductions (and the standard deduction) with 15 percent tax credits. My preliminary estimate is that doing so will raise about $1.5 trillion in revenues over the next 10 years (without taking into account any transition relief).

My suggestion would still preserve about one-half the aggregate current economic value of personal itemized deductions, but would do so in a way that adds to the progressivity of the tax code. Nonetheless, the scale-back in the value of the personal itemized deductions should be phased in over several years.

I fully recognize that the home mortgage interest deduction and other personal itemized deductions invariably are described as “sacred cows.” But they are sacred cows that we can no longer afford to maintain. Either we corral these sacred cows, or we allow them to stampede over us.