There are a handful of issues with this (not saying it's right or wrong, just pointing out the issues):
-you still have the same problem which kicking outlines above...kids don't learn then what's acceptable and what's not
-some coaches tend to take advantage of the situation and instruct their kids to be more physical in order to earn that promotion (they can worry about refining the game later)
-as a result of the above, when either two physical teams meet, or worse a physical and more technical team meet, after the initial fouls aren't called, the parents of the technical team begin to get worried about their young children and the ref potentially risks losing control of the game if he hasn't controlled the fouls....either the teams accelerate into ever increasing fouls, or the parents begin to call out the refs to protect the kids.
-some refs carry over the same "let them play" to the olders then, where it becomes more problematic.