You know, I really didn't think I'd have to explain the difference between a 15 man unit and a 40 man unit. If we assume a unit with good training, over 70% cohesion, and over 60 weapon and armor, a 15 man unit will have about 300 CS. A 40 man unit will have over 600 CS. You only hurt your own realm by giving your knight a crappy tax rate.
They will be less effective in battle. That's just means they are less good at what they do, not that they can't do as much. They can go fight battles or do civil work just as 80+ men units can. They just won't be that effective. And besides, that !@#$ty income in a rich realm can maybe allow them to do more than a good income in a poor realm.
lmao
Yea, keep your knights with !@#$ty armies, eternally begging for money in order to maintain a small army, that will do wonders with retention! 
Specially when they see the ruler and powerful people running around in large nasty armies, deciding the fate of battles practically on themselves, and they only getting a handful of orders (which if they fail to follow is no big deal, as they are quite expendable anyway, as long as they keep providing estate).
And, honestly, most people I've invited wanted to be /players/, not spectators of a very powerful realm. What you've described is the best way to drive away experienced players from your realm, and new players from the game. It only works with extremely unambitious people (the holy grail), multis, and half-active people that know you already, so they don't really care.
Nowhere did I say that *I* did this. I just said I expect you are making more of a fuss about its consequences than it truly is.
I've personally always been ambitious, and in my first years I *always* saw dukes and powerful people having bigger units than I had. Was I disappointing? Sad? Angry? No, I considered it *normal* that people higher up get more prestigious units. The e-peen is earned. And as such, every time I could increase my income to increase my unit size, I was delighted. Basically, because I was increasing the size of my e-peen.
Because that's all unit size on the character scale is, an e-peen.
