I have a hard time seeing how it could increase lag. How would showing 18 people getting hit at 20' be any different from 18 people getting hit at 40'? I'm not asking to see OTHER people's damage numbers, I only want to be notified when my own character is hit by any type of damage or effect, regardless of distance to it's source.
If chatlog can't be used, show at the very least some graphical effect, like damage numbers or spell effects.