I'm not really sure its completely due to TDP. Iris Plus is nice for decent graphics at a lower power usage, but I'm pretty sure its efficiency optimized, not built for higher TDP. Even if you pushed the same power to the 1065G7's graphics as what is available to the Vega 11 graphics, it probably wouldn't scale that much higher. I'm sure Intel could have released a higher TDP optimized Ice Lake with this gen, but decided against it. I'm also not sure where you are getting that Iris Plus graphics is just as fast a mobile Vega when Tom's tests here clearly show the contrary.
I didn't test mobile Vega chips, though. A 35W Ryzen 7 3750H with Vega 10 Graphics isn't going to be as fast as a 65W Ryzen 5 3400G with Vega 11 Graphics. I don't think it would be
that much slower, however -- probably 15-20%.
But you're definitely correct that Ice Lake and Gen11 wouldn't continue to increase in performance with higher TDPs. Going from 15W to 25W is a 67% increase in power -- and at the outlet I saw power use go from ~30W to ~45W -- and performance improved by 35% on average. If the TDP were raised to 65W, unless the GPU clocks could scale much higher than 1100 MHz, performance and power would max out at some point well below the 65W limit.
As for the relative sizes of GPU and CPU ... I need to correct that. I've looked at some die shots now, and it does appear that Xe Graphics is far more compact than Gen11. Interesting. It's about the same size for the CPU cores and GPU cores in TGL.