The idea has possible merit, but I want to complain about how you're getting to it. For one thing, the implication that inflation is politically easy is probably not true. There is a large contingent of the right (e.g. the Ron Paul crowd) who are always running around talking about auditing the Fed and how fiat money is ruining everything, etc. More strategically, the people who have the greatest incentive to fight inflation are money lenders who own outstanding fixed rate debt, i.e. banks, and as we've learned recently the banks are not exactly without political influence. Though granted increasing the rate of inflation probably is politically easier than raising taxes.

The second thing I want to question is this:

>So if the government's taxes are too high, the wealthy won't have the money to invest, but if the taxes are too low, the wealthy have a no-risk, stable return on their cash- sitting on it.

How does sitting on cash generate any return at all? You have to invest it in something to cause the value to increase, unless the value of money itself is actually increasing (i.e. a period of deflation), which is almost invariably its own brand of near-immediate catastrophic meltdown.

But you're on the right track, because the problem at present is that they invest their money in safe investments, like treasury bonds, as opposed to higher risk private investments.

The relationship between the investor purchase of government debt and economic growth is very squishy: It's effectively investing in the government. Higher demand for government debt reduces the interest rate the government pays. The money not paid in additional interest by government is then put back into the hands of Congress which it can use to either reduce taxes or fund additional programs at the same level of outstanding debt principal. If the government uses the money wisely then it helps the economy; if they use it inefficiently (or just less efficiently than private enterprise would have) then it hurts.

Naturally this leads to all of the arguments about who should get tax cuts and whether government spending, or what kind of government spending, is better for the economy than putting the money in the hands of private enterprise.

But the other compounding factor is that the normal way we know of to cause inflation is for the Fed to print money and buy government securities with it. This will certainly drive private investors away from government securities, because you simultaneously have the Fed bidding down nominal the interest rate and the inflation reducing the real returns at a given nominal rate, but that doesn't mean you don't you still have the same amount (or more) of capital being "invested" in the government (i.e. the real interest government pays on capital goes down not up), it's just that the Fed is doing the investing with newly created money instead of private enterprise doing it.

Furthermore, if you drive the private investors away from government securities, the question becomes what they invest in instead. This is the flip side of the "who should get tax cuts and what should taxes buy" question: If investors tend to take their money and invest in R&D then we're in business. If they tend to do commodity speculating with it then we're in trouble.

It pretty much seems to come down to this: We need to find a way to get investors to invest in things that help the economy. "Quantitative easing" may cause them to do that either if the default private alternative to government securities is economically beneficial, or if we can arrange for it to be using e.g. tax incentives or government subsidies.

I think we're grokking the same here, but one disconnect:

You're presupposing that the wealthy want _some_ return on their wealth, and I think that in many cases, that simply isn't true.

Take a look at all of the money stranded offshore that corporate America is waiting on Uncle Sam to allow into the US without taxing- that money is probably not earning much if anything; think of the tinpot dictator or the kleptocrat who squirreled away a nest egg in a Swiss or Cayman bank account, and think of the smuggling kingpin south of the border with a swimming pool full of cash.

They all share the following in common- highly liquid and inefficiently invested wealth. They have little hope of increasing the value of this wealth by investing it or consuming with it because to do so requires a big hit to its dollar value (taxation or risk of seizure). The best return (for them) is to let it slowly (in our case very slowly) inflate until a rainy day comes.

The only practical and sure-fire way to bring that money back to productive use is to redistribute it via inflation.

Why do you expect that capital held offshore for tax reasons is invested inefficiently? These companies are not (in general) in violation of the law, they're just exploiting transfer pricing[1] to accumulate capital in a foreign subsidiary in a low tax jurisdiction. That subsidiary can for the most part still invest it in whatever, including U.S. stocks and other securities. They can in many cases even loan it back to their domestic sister company so that it can use the money to grow its business (without paying tax on it, because it's a loan instead of income), which often provides even more tax benefits because the interest paid on the loan is often tax deductible in the higher tax jurisdiction.

There are some restrictions, e.g. the U.S. company may not be able to issue a dividend or do a stock buyback unless it reports at least some taxable profits within the U.S., but as long as the foreign subsidiary's capital account keeps growing, it causes the parent company's stock price to appreciate accordingly and that provides investors with their ROI.

There are ways that this can be less efficient. In particular, the parent company's investors may themselves have made more efficient investment choices than the company's executives investing the money on their behalf if their returns were provided in the form of dividends or stock buyback instead of stock price appreciation as the existing tax code strongly encourages. And this is actually very likely to be the case in practice, because e.g. Apple executives are now sitting on a huge mountain of cash that it likely will never be more cost effective to issue all of as dividends under the current tax code than continue to invest in situ, which means that computer company executives are now permanently in charge of picking stocks for however many hundred billion dollars worth of the world economy. That doesn't guarantee that those execs will make worse investment decisions (or will choose poorly in hiring someone to do it), but it seems at least plausible that someone hired primarily for their ability to sell iPhones or manage a global supply chain will be a worse hedge fund manager than an actual hedge fund manager. But this is just the capital gains tax debate all over again: As long as we tax even reinvested dividends immediately but allow unrealized stock appreciation to be tax deferred indefinitely we're going to spur that sort of crazy economic machinations.

[1] http://en.wikipedia.org/wiki/Transfer_pricing