The current sound quality of music from the iTunes store is good, but it's definitely not the best.
I think what Apple tried to do here is balance out sound quality and file size. I'm amazed that I have purchased 100+ songs from the iTunes store, and that amounts to only 1GB of space.
I would say better sound quality from the iTunes store is needed, but you would have to sacrifice the very low-size file system currently in use.
I have not bought a single CD (just blank CDs!) since I started using iTunes. It really is the best way to purchase music, especially when you only want a single song or select songs from an album.
I used to hate how before, I had to buy an entire CD just for one song. Now, I can buy just that one song for a buck. Great concept.