Why are interests rates as a money sink preferable to the more direct approach of simply sinking money out of supply via tax? They seem to amount to the same thing at the end of the day - siphoning dollars out.
That is also a valid approach but I'm not sure it is more direct. Tax policy is generally only set once a year and only affects tax payers. Interest rates can be tweaked more frequently and (I think) directly impact a larger subset of economic players. That and the Fed doesn't determine tax rates.
Your point about how tax rates are set compared to interest rates is true, but could be changed.
I don't follow the second part though: pretty much everybody pays a significant amount of taxes, if only the likes of sales tax. Far fewer (though of course still many) players have substantial interest income or expenses.
The Federal Reserves implements interest rate increases by selling the bonds that they own (bought in the past) in the market in exchange for cash ("Open Market Operations"). This takes cash out of the hand of the public (in exchange for cash that can be spent in the future). That's about as direct as it gets.
Removing cash in the public's hand via taxation has several drawbacks, as mentioned by other posters. It's a very slow legislative process, because it has much more direct distributional effects (who is going to be taxed?). Additionally, most academic economists believe more taxation reduces real, as opposed to nominal, economic activity ("distortionary effects of taxation").
Why governments don't do monetary policy by fiscal means? Well, because the central bank is the authority on monetary matters, and the congress the authority on fiscal matters. They don't even usually agree on what direction to go. (Things are this way on every democracy.)
But that specific question, nobody would take money out of the economy by fiscal means, even if they could. You would need huge fiscal changes to have the same effect of a small monetary restriction. And you don't do huge fiscal changes, ever.
This way, you'd only be vacuuming dollars held by US entities (citizens, companies), while USD is a global currency held by everyone in the world. This policy would greatly benefit non-US entities, at the cost of US entities.
Do non-US entities tend to have more assets in USD or more debts? I'd assume the former, which means that a US interest rate increase is actually net beneficial to non-US entities.
Interesting. It isn't obvious to me how the Fed(a US org) setting interest rates necessarily affects non-US entities. Could you explain the causal chain?
