Why would a TAR file be smaller than its contents?

You get a difference because of the way the filesystem works.

In a nutshell your disk is made out of clusters. Each cluster has a fixed size of - let's say - 4 kilobytes. If you store a 1kb file in such a cluster 3kb will be unused. The exact details vary with the kind of file-system that you use, but most file-systems work that way.

3kb wasted space is not much for a single file, but if you have lots of very small files the waste can become a significant part of the disk usage.

Inside the tar-archive the files are not stored in clusters but one after another. That's where the difference comes from.

Having no knowledge of what tar you're using or what sort of Unix system you're using, here's my guess: oldcode contains numerous smaller files, which when by themselves use disk space inefficiently, since disk space is allocated by some sort of block, rather than byte by byte. In the tar file, they're concatenated, and make maximum use of the disk space they're assigned.

This has something to do with the blocksize of your filesystem. man 1 du on MacOSX 10.5.6 states:

The du utility displays the file system block usage for each file argument and for each directory in the file hierarchy rooted in each directory argument. If no file is specified, the block usage of the hierarchy rooted in the current directory is displayed.

[mirko@borg foo]$ ls -latotal 0drwxr-xr-x   2 mirko  wheel   68 Jan 30 21:20 .drwxrwxrwt  10 root   wheel  340 Jan 30 21:16 ..[mirko@borg foo]$ du -sh0B  .[mirko@borg foo]$ touch foo[mirko@borg foo]$ ls -latotal 0drwxr-xr-x   3 mirko  wheel  102 Jan 30 21:20 .drwxrwxrwt  10 root   wheel  340 Jan 30 21:16 ..-rw-r--r--   1 mirko  wheel    0 Jan 30 21:20 foo[mirko@borg foo]$ du -sh0B  .[mirko@borg foo]$ echo 1 > foo[mirko@borg foo]$ ls -latotal 8drwxr-xr-x   3 mirko  wheel  102 Jan 30 21:20 .drwxrwxrwt  10 root   wheel  340 Jan 30 21:16 ..-rw-r--r--   1 mirko  wheel    2 Jan 30 21:20 foo[mirko@borg foo]$ du -sh4.0K    .

As you see even a file of 2 bytes takes a whole block of 4kb. There are some filesystems which avoid this waste of space by block suballocation.