I agree on everything in this post. Couldn't have said it better myself. Just ban or deduct points from every guy that gets 5 or 10 reports on him. That way you'd know that it's no coincidence if the guy has offended so many people and he will be correctly banned.
Deducting ELO points is a bad idea as ELO measures relative playing strength not manners so in effect you would be penalizing lower rated players as they lose to the now underrated offender.
You want a computer algorithm to ban players? Can you not just turn off your wall and chat functions? Why deprive me of potentially angry people to laugh at and block?
I've been here 7.5 years and have been playing chess at dozens of sites online for 18 years. Most sites are far, far less moderated - and generally more open to abuse - than here. In all that time, I've reported one individual who was making death threats (that was here, not too long ago). His account would be deleted and an hour/day later he would resurface with a new account and continue harrassing me, both here in the forums and through private messages. Chess.com probably deleted 30 of his accounts until he finally grew tired of it all and went away. The point is, he couldn't be stopped and, really, his words, while annoying, amounted to nothing.
One problem with any system that punishes people is that it also incites escalation. A short while back, chess.com revamped the forum rules, giving that which had been previously moderated nearly free reign in an isolated area (Off-Topic). This was partly because certain moderation and punishment escalated things and caused loads of problems.
Another thing is that, at least to me, words themselves aren't as big a deal as ideas. It may be possible to target words, though only in a limited way, but you can't filter ideas, prejudice or hate. So you're left with the already-in-place method of reporting or submitting tickets. How this is done will possibly change somewhat when v3 is released.
Solutions are often counter-productive, so they should be implemented cautiously.