Touch screens are designed to provide a bridge between your finger and the virtual world, to provide direct control without the visible use of a tool like a mouse or keyboard. That direct connection makes lag all the more frustrating on smartphones and tablets, which often have touch delay times far higher than the 2-10 millisecond responsiveness our eyes expect from LCD screens. Microsoft's Applied Sciences Group built a touch device that exceeds normal touch responsiveness; in fact, at one millisecond, the touch sensors react more quickly than most LCDs on the market.
The demo below demonstrates the massive difference between 1ms and screens operating with a 100ms latency. Alas, this is just Microsoft Research showing us how great near-instantaneous touch performance would be--the technology may never show up in a consumer device.
Touch devices are limited by more than their capacitive sensors when it comes to response times. CPUs and GPUs have to be fast enough to process data and animate everything on screen as it reacts to our movements. Currently the tablet market is in a spec war for better and better components--touch sensors are not seeing much in the way of innovation.
On the bright side, when someone does focus on bringing response times down to one millisecond, the rest of the hardware may be ready to handle it.