Well then, I think in that case, a lot of the cheering, and banging of tables that I heard at the culmination of that live recording was just other people "hear(ing) them (i.e. the lyric) through the distortion of their prejudices".

No doubt there's truth in that. It just shows the power of the song (and song in general) to affect people, and emphasises the need of the songwriter to be sure of what he's saying and how he says it. I think the song can be defended because, as you point out, he has written other songs on the same theme with equal passion, "Hey Sandy", "Margarita" "Song for Anne Frank". These are all about the innocent caught up in a madness.
I think the problem with "Soldier" is that he includes the soldier among the innocent, a young man who is a victim of unemployment and good PR. and some people have a problem with this.
However, it's happening again in Iraq where young men have been sent as "liberators" and "peacekeepers" but are finding themselves seen as "occupiers". The mother camped outside Bush's place is making the same point as the song in many ways, claiming her son didn't die defending his country against attack but died as a tool of politics, a man caught between the eternal rock and a hardplace, like the soldier in "Soldier."