I'd take it to mean the size of one's vocabulary in practice, not just the words s/he knows. There's obviously still no necessary implication that a swearer's vocab usage is worse than that of a non-swearer.
Strict logic aside, though, I've anecdotally observed that folks who swear publicly among people they don't know tend to swear easily and often, and given the inherent flexibility of most swear words, I think it's fair to say increased usage usually takes a toll on eloquence and creativity in diction. The relationship isn't necessary, but it's intuitive and observably common.
Interesting ideas, but I'm not convinced by your last point.
Amongst the people I know who swear with reasonable frequency, I don't see any correlation with lack of eloquence. Indeed, I can think without trying very hard think of published authors, professional screenwriters and famous Shakespearean actors who would fit into the "uses profanity reasonably casually" description.
Oh, I don't mean swearing and eloquence are mutually exclusive.
But eloquence isn't binary; it lives on a gradient. Where there's a common, monosyllabic, four-letter word, it could be displacing another with a fair likelihood of being more interesting.
In fact, I'd argue your Shakespearean actors are far more likely to be making a compromise than an ineloquent person who'd otherwise drop the modifier or use a simplistic alternative.
So they're not rendered ineloquent as people, of course; but less eloquent than they'd be without that crutch.
Some educated people reel in horror at the thought that they aren't all that different from normal people aside from the number of things they've crammed into their head.
