Why do most piano teachers dislike the idea of students playing by ear and arranging songs on their own? Is there a good reason or are they just bad at it themselves? Why is creativity not usually accepted at a piano lesson?
We dislike them improvising when they should be reading! Prove that you CAN play the piece accurately as written - that you have that much control over your eyes, brain and fingers - then I'll be delighted to hear your original extemporisation or composition. But I'm not going to be impressed by your reluctance to read or inability to play what's on the page! And you shouldn't try to twist it into being a virtue.
A good piano teacher should recognize both. A good piano teacher should realize that students who are not engaged will generally quit lessons early on, after a few months or a year or two (and thus deprive the teacher of the income the student generates for them). Different students have different proclivities and talents, and a teacher would do well to cultivate ones that keep a student interested.
That said, there are very good reasons for being able to play a piece well as-written. Developing good technique, control, etc. is the first stage, and only when you've learned the notes can you then move on to introducing layers of expressivity within those specific notes.
On the other hand, being able to play pieces by ear, being able to improvise, etc. are incredibly valuable skills. I agree that many piano teachers do not emphasize these qualities in lessons, particularly early on, and mostly to their students' detriment. I have met many pianists over the years who took 10-15 years of piano lessons, had flawless technique, etc., and could play several high-level pieces perfectly, but could barely sight-read even the simplest music, knew nothing of chords or basic composition, and certainly could never improvise. In my own opinion, those students were done a horrible disservice.
Not all teachers are like this. If you find your teacher is not amenable to the style of piano you're interested in playing, perhaps consider finding a different teacher. On the other hand, don't underestimate the critical skills learned in actually reading music fluently, applying good technique to the execution of specific notes, and being able to play the precise notes both accurately and expressively. And exposure to other compositions is usually the basis for a better repertoire of material and ideas for future creativity and improvisations.
An important task in learning any instrument is learning the physical technique of playing it.
Put an intelligent, "naturally musical" student in front of a keyboard, with no instruction, and they will figure out some way to press the keys down. But even if they watch some videos of talented players, most of them will never discover how to play anything that is not technically elementary.
Improvising, playing by ear, etc are challenging enough activities on their own, without trying to push your technical skills to the limit at the same time. So the end result is that you can only imagine things that you an actually play.
The "Bwv anh 114" example in the comments is a good illustration of this. Basically, you are throwing away the technical challenge of playing two independent parts, by letting your left hand just prod one note on the first beat of each bar. If you never want to progress further than playing one note (or chord) on the first beat of each bar with your left hand, that's fine, but maybe learning to play the piece as written (which is more challenging, but still only at an elementary level) will be more benefit in the long run.
(And I''ll bet the "one bass note per bar" version threw out all the ornaments in the right hand part as well, to make it even easier. In Bach's day, beginners were expected to play trills and mordents starting from day one, and not think they are something "difficult" to leave till years later!)