The context in the original question makes clear: the OP is not looking to save space. He wants to take out the structural (tabbed) spacing inherent from the nesting of XML in order to make it visually clear where documents have manually-inserted whitespace.
This is actually a really interesting question, although I'm not sure the answers there are very helpful. I would prefer seeing the code actually indented, and then a light-gray visual guideline where the structural indentation ends, e.g.:
|<xml:something>
|<xml:what-the>
| left some extra whitespace
|</xml:what-the>
|</xml:something>
Good luck with that, considering I find it hard to manually decide how to indent mixed PHP, HTML and Javascript code. I can't imagine an automatic tool having any success.
That's more or less what I told him on his other question. He originally wanted to make it more general-purpose, so that this same editor interface would be used for programming languages in general. I did my best to talk him out of that madness and he has since narrowed his scope to XML.
If you only look at the HTML it looks like a doubly nested table.
If you only look at the PHP the inner elements of the table will not be indented correctly.
And this is a very simple example. Real code can be far more complex - for example the table tag could be generated by a function, and not even visible in this file.
If you took my indenting, and converted it into some kind of graphical display that might be cool. But automatic detection? Good luck.
This is not the question asked. The question is specifically about XML documents, where there is a single and quite easy correct answer for the indentation.
It's been a while since I used an IDE (instead of vim), but don't most of them support code-folding that provides a light gray bracket for a block of code (usually with a collapsible indicator at the top)?
Note vim can do folds too. (Not a commonly known feature, I only learned about it recently myself.) But the effect he wants is the literal bars showing indentation levels which I think some IDEs have... vim could fake it by highlighting the bg cells.
I believe Xcode 4 does something similar to the heatmaps shown here, although it does everything vertically, in shades of gray. You can sort of see it in this screenshot - look in the left-hand margin of the code editing window. http://www.neowin.net/images/uploaded/xcode4.jpg
If we got rid of indentation, I'd like to think it was replaced by something that took less space, not more.