Now using my Surface Pro 2, I see the problem, and I have identified the issue.
The problem is the Intel integrated graphics changes the brightness (and or contrast) of the display at a software level. This is part of it's power saving abilities. As it is software color adjustment, it creates banding. The whole thing is completely retarded, but its Intel integrated graphics, so it doesn't surprise me one bit. This is why I want consumer to push manufacture to use Nvidia or AMD offering. Intel integrated graphics is a free graphic card. That is what you get for free. Manufactures and Intel thinks that all we do is Youtube and Office, which is untrue. And some of them, even enjoy colors. Much like people buying dedicated sound card for a premium sound experience, while not being an audio enthusiast, they just seek better music experience over onboard solutions.
And Intel integrated graphics has a long list of issues and limitation. This is my first system where I don't have Nvidia or AMD GPU as I had no choice... and to me, it shows like a soar thumb that the GPU is absolute junk. Forget performance per watts efficiency, or performance of the device, I am not even talking about this.
Anyway, to get the Intel drivers installed... because it's Intel you have to do the following:
-> Download the zip version of the drivers, and extract them somewhere.
-> Uninstall the drivers from device manager, and check the box to delete them
-> In Device manager, tell the graphic card adapter to use the extracted drivers
-> Restart and you are set.
Note that you'll lose all power saving features of the Intel integrated graphics, which will drop the battery life of the device.
To revert, uninstall the drivers from device manager, and check the box to delete them, then do a Windows Update, and you'll find the latest Surface Por firmware appear again. It will install the graphic card drivers again.
The touch screen display is not related to the graphic card. It's like your mouse, or your keyboard, just another input peripheral device.