"I'm amazed at the amount of hatred directed towards this - as if the terminal could in NO WAY be improved?!"
Improve it all you want, I'm totally into that. The problem is that once your "terminal" ceases to be a terminal emulator then you lose so much it's pretty unrecoverable.
Most of the things that you suggest are very much technically possible for a shell (perhaps zsh with some extensions) running in xterm. You'd be left with some sort of unholy combination of a rather modernized `mc` and an otherwise modern shell, but it'd be a very interesting product.
tl;dr: We're not opposed to improving the 'terminal'. I'm opposed to 1) mistaking "improving the terminal" with "improving the shell" and 2) losing the terminal.
A terminal emulator running on an object-oriented system like Termkit could run vt100-friendly filters to convert everything to text before it is sent down the line to the user. Users who did not know they were connecting to such a system might not notice the difference.
Although I am not entirely sure what you are attempting to communicate, what I will say is this:
If you do not provide direct user access to a pseudo terminal through a terminal emulator, then you will undoubtedly lose functionality. You need both the pseudo-terminal and the terminal emulator. If you do provide direct user access to the pty through a terminal emulator, then what the hell is the rest of the crap there for?