Yes.  Exactly.  In the XML world (and in semi-structured data in general) a schema is nothing but a transform.

And yes, for years I've been saying that the power of XML is not extensibility but rather transformability.  I need to get my old "Chameleon XML Models" presentation on SlideShare.

I do believe in expressing business rules and constraints, but I think strong, static typing is a very bad way to do that, which is the problem I have with XSD.  I much prefer Schematron, Examplotron and RELAX NG.  I think the worst side-effects you mention come when people try to impose such strong typing constraints on XML, which, properly used. is about text, and not data.

Which brings me to the issue you set aside.  i do think that Mixed Content is essential to the culture of XML because I think that's what underscores the fact that XML is about text and not data.