The problem is that ISO-Latin-1 doesn't contain these characters: “ ” ’ –
They can't be translated to ISO-Latin-1, so the text cannot be sent to the terminal. If you Paste text containing them, the Paste does not happen. Similarly, if you type the characters on the keyboard, Terminal beeps.
…one would think that it could be as smart as it just got rid of the characters in the paste maneuver but, it just doesn't paste anything in.
Possibly, except that you wouldn't want it silently omitting a few characters here and there. Perhaps Terminal should display an alert if it can't translate the text, and possibly offer you the option of simply dropping the invalid characters.
If this is important to you, please file a bug report: http://developer.apple.com/bugreporter/
(If you don't already have one, it requires a developer account, but it's free.)