Earlier quoted context omitted.
I assume Microsoft never allowed, say, swastikas. There's no reasonable expectation that you are able to spread racist propaganda in a car racing game (or for that matter in an actual car race; I think those tend to have very strict rules around decoration). I can see an _argument_ that Twitter, say, should be forced to pander to racists. I don't buy that argument, mind you, but I can at least see the thought process…
The Nazi flag is inarguably racist propaganda. The Confederate flag, however, has for decades been a symbol of southern pride for many people. I read somewhere recently that over 40% see it as a symbol of heritage more than racism.
The winner gets to make the rules. The South has had 150+ years to celebrate their treason. It's more than enough time that the winners put that symbol to rest.