"I have read that the MP4 compression off iTunes is SUPERIOR to even the highest MP3 compression. Can that possibly be true?"
no, it's not, it really depends on the song. on the average, though, an MP4 sounds better than an MP3 at the SAME bitrate. (a 320kbps MP3, however, is better than a 128kbps MP4)
"...can these sound as good as the RAW file right off the CD?"
nope, not even close on a nice hi-fi system, but PERFECTLY fine for portable use (car rides, ipod w/ headphones, et cetera).
"I realize it's nearly indistinguishable on a computer, but I'm talking putting it on a nice home stereo, etc."
depends how nice, but any compressed music is going to sound noticeably worse on a very good set-up.
"It's been my understanding that once you compress the audio from the RAW format, there's no way to regain that fidelity lost, even when you convert back to CD Audio."
this is correct
"I am all for paying, but if it's only $5 or so more, I'd rather buy the actual CD, and then import the tunes to my library that way."
if you're an audiophile, definitely go for the CD unless there are just a few tracks you want to download. Regardless, if you want to listen to the music on a very nice stereo, buy the CD...or better yet, buy the SACD (incredible sound).
You've got it. The iTunes Music Store isn't directed towards you in its audience. It's directed to people who just want a convenient way to hear their music nicely, but don't care about the detail of the songs. It's also directed to iPod people who will listen on-the-go but won't be putting these files on their hi-fi set-up.