There are a couple of reasons you might want more space, including
- The ability to install games on your Xbox. This speeds up transfer rates while playing but is nothing more than a mild luxury in time.
- The ability to buy, download, and play games and demos from the Xbox Live Arcade/Digital Store, including massive retail titles like Skyrim. These take up considerable space, but given your current playing/buying preferences, you should be fine with just regular discs.
- Storing/Playing lots of media from your Xbox. Movies, pictures, music and more can all be played back from the Xbox, and take up space.
Given your listed gaming preferences, you should be fine with just a regular 4GB Xbox for $200, as you don't appear to need any extra storage space. Worst-case cheapo scenario, buy a flash drive and plug it for some extra storage, or go all out with a USB hard drive.