For the longer explanation, let's look at history. Way back in the way back, there used to be a boss mechanic called "Crushing Blows." The gist of this mechanic was that you had a 15% chance to be hit for 150% damage by a boss. Ouch! However, two of the three existing tank classes had ways to remove or reduce the likelihood of those crushing blows. Paladins had the original Holy Shield, and Warriors had the original Shield Block. The third tank, Druids, were compensated with extra high health and armor, so that while they took additional damage from time to time, they took less damage on each individual hit, and since they had more health, you had more time to react to spiky crushing blows. Tanking worked, by and large. There were a lot of problems with design, but most of those revolved around fights that were designed only to be tanked by a specific class. Avoidance was also too powerful.
Moving on to Wrath, they got rid of Crushing Blows. They felt too random. That led to the Naxxramas problem--the tanks never died. In turn, that took us to the Ulduar model, which was used for most of Wrath--high damage on a short cooldown to threaten tanks.
The problem with block capping is that it brings back crushing blows. Paladins take 70% reduced damage--or expressed differently, everyone else takes attacks that hit for 143% damage. Now, to be honest, this isn't that big of an issue necessarily for Warriors and Druids. Warriors will be unhittable 1/3 of the time, and with trinket procs and mastery gains, probably net out somewhere around 5% hittable. Similarly, druids aren't terribly problematic because they have higher avoidance and higher base armor--they only take swings that hit for 82% of the other tanks damage anyways.
The problem comes down to Deathknights. If you make it so that you have a comparison between a DK and a Paladin, the DK will take more damage, more spike damage, less predictable damage and is compensated through a reactive healing mechanic. That isn't fun.
The problem with block capping is that if we were to have a boss hit a paladin for 50K, that same boss hits a DK for 74K. All of a sudden, three hits in a row on a DK adds up to 222K, while it only comes to 150K for the paladin. Block capping means that "spikes" mean something different to a paladin than a DK (and to a lesser extent a warrior). A DK in three shot territory is a paladin in 4 or 5 shot territory. That's a problem for game design.