> An interest free loans means you’re ahead in that transaction.
Except that you had to sit on some asset in the meantime instead of using it for something. Or if that asset was a productive investment that yielded returns, the government is ahead in that transaction, because the returns from investing the deferred taxes increase your taxable income.
> One can’t invest all their money in any given year or one lacks the ability to buy food. You also can’t spend all your money in a given year or you go broke.
You can both invest all of your assets by taking on new debt to buy food and spend all of your assets and have nothing left. Both of those are things some people actually do. And for people who neither spend nor invest 100% of their assets, different incentives will affect the proportion of each one they do.
> Thus both saving and spending are happening and reducing the amount of money required to save means you can up spending.
Suppose you're paying a tax rate of 33% and have access to investments with a 10% return. If you have to pay the tax when you get the money then if you get $100 you immediately lose $33 and can only invest $67, and if you get 10% interest on the $67 then you can only reinvest $4.49. In other words, your compounding rate is now 6.7% instead of 10% and after 10 years you'd have $128.
If instead you pay the tax when you spend the money, your compounding rate is 10%. So if you started off with $100, after 10 years you have $259 before tax and then you pay a third of that in tax and get to spend $174.
So in one case you have the choice between spending $67 today or $128 in ten years, in the other case your choice is between spending $67 today or $174 in ten years. That increases the incentive to invest the money now and spend more of it later, instead of spending it now.
You do then get to spend more of it later, but the extra money you get to spend is value that only exists because of the additional investment.
And then the government gets $85 in taxes in 10 years instead of $33 today, i.e. it got a 10% ROI too.