When I'm the GM, I'm acting as the moral arbiter for what player characters do in the game.
Of course - I wasn't assuming you're telling them how to live their lives.
My point is this, though: A player has his/her PC take action X. You, as GM, declare that X is non-good, or even evil. Now if that declaration has meaning only within the fiction - we have some gameworld defined notion of "good" or "evil", then the player's natural response might be "OK, so what?" - something like [MENTION=6668292]JamesonCourage[/MENTION]'s players, as judging from his posts upthread. Which is fine, but in my view undermines the idea of the paladin, which is not to be an exemplar of some or other fictional value but to be an exemplar of honour, valour, chivalry, courtesy etc.
Conversely, if in making your adjudication as GM you mean to say that X is, in some non-fictional sense, non-good or even evil, then you
have acted as moral arbiter - you are correcting the players' judgement of what sorts of action are or are not morally permissible.
My own intuition is that tables which start in "real value" mode, in order to avoid hurt feelings and slights against character, are likely to drift to "fantasy value" mode - "It's just a a game, and someone has to have the adjudication task, and that's going to be the GM". Which is fine for managing interpersonal relationships, but as I've explained tends to undermine the thematic heft of classes like the paladin (it's not real honour, it's fantasy honour that the paladin is committed to upholding), or the druid (it's not real nature, it's fantasy nature that the druid is committed to upholding), or the cleric (it's not real mercy, but fantsy mercy that the cleric of the god of mercy is dedicated to upholding), etc.
I should add that my views on this aren't purely speculative. It's a real issue I've encountered in play. Hence my preferred solution, which makes all the issues go away, of abandoning mechanical alignment - which permits characters to be framed by reference to real, not fictional, values and ideals without requiring anyone to act as moral arbiter at the table.