Hello,
Thank you for noticing this.
This setting is acutally only influencing diagnostics and not removing anything. When turned on the close tag is underlined as a problem and we offer a quick fix (can be applied automatically during save).
But in general we do not want to remove anything from the source code other than whitespaces when formatting.
We'll reconsider the setting, possible rename it, move it to somewhere else. Since as you've pointed out it's confusing right now.
Thanks again for pointing this out.