If the government wanted to destroy bitcoin what they could do is do business with bitcoins and every bitcoin they got, just send to one wallet file and either destroy it or never use it. This would cause deflation till there were very few bitcoins left. With the current amount of bitcoins they could go on an exchange and buy them all up pretty easy.
This would not work and would cost the government a lot of money... so maybe they'll try it =)
It doesn't work because Bitcoins are infinitely divisible. Short term they're divisible to 8 decimal places, but long term more decimal places can be added. The ramifications of this are quite remarkable really... for if the gov bought 20 million coins and destroyed them, there would still be 1,000,000 x 1,000,000,000 currency units available (assuming all coins have been mined). Then, two more decimal places can be added and there would be more units than the system started with!
Now, most people get very turned off by that, believing it to be inflation. However, it does not have the adverse effects of "money printing," because the unit values are instantly reflected among all holders of the Bitcoins. When the Gov prints money, your bank account doesn't increase in proportion, thus you've been robbed. When Bitcoins are added through new decimal places, every client reflects this, as do prices, and thus no significant adverse or immoral effect is caused.
So if the Government started buying coins to destroy them, it would send the value sky high, and there would always and forever be enough units of the currency to enable trade. In the same way, it doesn't matter how many people lose their own coins (it's only bad for those people, not for the economy or other holders of the remaining coins).
