Is putting a 1" tang in a 36" tank any worse than having a 8" tang in a 96" tank? I always see people saying that these fish need more room and certain tanks are too small and on and on. Just wondering why it would be such a big deal to have a 1" blue hippo in a 36" tank ( 36 x it's body length ) versus a 8" blue hippo in a 96" tank ( 12 x it's body length). I know the argument is always over the fact that they need swimming space but in this situation would the smaller fish not be better off??
You are correct in saying that a small fish would still have plenty of swimming room in a smaller tank. In this case the tang will outgrow your tank, but so long as you plan for that eventuality, that should be fine.
I personally have a small Regal (Hippo) currently residing in my 10 gallons and doing great. I know it'd probably only last in there for another half a year or so, but is moving in about three months and gonna do an upgrade so not worried. Plus I work for a LFS, so can always bring it there in the worst case scenario.
A bit of preparation is all it takes.

So yah imo if you are prepared for the eventualities, then go ahead.
[EDIT]
Thought I'd just mention:
I've actually had a few customers add a tiny fish to a huge tank, and they had trouble being comfortable venturing out, didn't get any food, and eventually died. Happened quite a number of times now. So in a way, it's probably actually
better to let a small fish grow in a smaller tank first.
Sometimes it's not necessary as some would add multiple fish at once and they'd be comfortable from the getgo, but without properly cycling most only add one at a time and well, the result is as above.