From what I've noticed, when that flag is up you do 2-3x the normal amount of damage and take much less damage, too. Combine that with the fact that you are being swarmed with hero characters (who fall like flies due to how much you get buffed) and, eventually, bosses (who will also be vanquished much easier). The xp rate would have been so insane that people who were looking to rank up would just be playing flag 24/7 without ever going into multiplayer/garden ops. It would be an incredibly overpowered method to gain experience, so they reduce whatever your current multiplier is to a 4th of that (0.25x if your multiplier is at 1x, 0.5x if it's at 2x etc) when you're in this mode.
Perhaps reducing the xp multiplier to only a fourth of what it was is a bit overcompensating though. It would have been very fast but I'm sure not 4 times faster than normal. Perhaps reducing it to something like 40% would have been more balanced.
Anyhow, it's still very useful for completing certain quests quickly and a lot of fun.
But to answer your question: the reason is that it would take people away from multiplayer and also just be unbalanced. The XP would have been INSANE at full multiplier.
