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.