Well in Windows XP you can manually set the window captions really small, and by using a different theme you could als make the taskbar really thin. But hey, this is litestep.net so use litestep and you can make everything as small as you want, but you knew that already.

MS did it probably to enhance user-friendlyness (for newbies anyway)
And is you are a poweruser you don't give a damn about the windows look, because you know exactly how to change it to your liking (i sure as hell did!)
I changed it into a MacOS X graphite look so i'm not saying one bad word about OSX :P