There will be no more free transactions.
So? I think we all understood that free transactions are doomed. They are only included now to bootstrap the network. As soon as the transaction volume is consistently over the block limit they will be discouraged.
I would address one more issue if I find it fits the motivation of the BIP, set a max size of the "generate" transaction to avoid miner-flooding (paying the generate transaction out to 1MB of addresses).
You mean the coinbase / subsidy? That's not in a miner's best interests since each additional payout address reduces the amount of space for transactions with fees. As the subsidy dwindles the incentive will decrease exponentially.
Unfixable in Bitcoin: It would be possible for a mining entity/pool to directly accept free or lower fee transactions under contract. In the miner's block, the miner can include directly-submitted transactions that are not published to other nodes, that appear to pay a minimum fee, but as the miner can "print" fees for free, they can refund the fees to the transaction submitter/gambling site/exchange, thereby offering a cheap occasional spam service.
A solo miner wouldn't have enough hash power to make this economical unless the contractee was willing to wait upwards of days or weeks for the first confirmation. If it was a mining pool, the pool operator would have a tough time explaining to members why some of the transaction fees were not paid out.
But I think you're getting confused with the "minimum fee." There is no minimum fee for transactions in an actual block, miners can fill the block however they want. Including having NO transactions (someone is doing this currently). The minimum fee applies to the relay of transaction messages through the peer to peer network, and it exists to prevent spam.
Either way, directly submitted transactions are not really a problem. A miner would never accept less than the current average fee per kilobyte for a direct submit since doing so is not in their best interests. And they would never need to post the transaction as including more fees than the average, since doing so doesn't help it get into the block (it's already a direct submit).
So far you haven't raised a single valid problem. Bitcoin developers, correct me if I'm wrong, I'm going by the information that I have read over the last few months.