When adding vital wheat gluten to a bread recipe, should one reduce the amount of flour equal to it? I've always thought that the rule of thumb for adding vital wheat gluten to a bread recipe was to add one tablespoon of it per cup of flour called for. A friend is telling me that rather than do that, I should count the vital wheat gluten as flour, and for every tablespoon of it that I add to the recipe, I should subtract a tablespoon of flour from the recipe. Which of us is correct and why?

The bread recipe that I'm following calls for 3 1/2 cups of whole wheat flour and 1/4 cup of dried, nonfat milk powder. I don't have the milk powder, so I thought that the vital wheat gluten would make a decent replacement for it. I also thought that I should increase the flour to 3 3/4 cups and add the vital wheat gluten on top of that, rather than directly substituting it for the dried, nonfat milk (because I've always treated it as an addition/improver).

ETA: I know that both dried, nonfat milk and vital wheat gluten are added to bread recipes to improve the texture of the crumb. What I don't know is how bakers traditionally treat vital wheat gluten: is it counted as part of the flour, or is it considered an addition/improver?
I wouldn't replace milk powder with vital wheat gluten.  Vital wheat gluten changes the gluten content of your recipe.  It's good for, say, turning whole wheat flour with a lower gluten content or AP flour into flour suitable for bread.  

When I add vital wheat gluten, I subtract flour as your friend does.  I only use it when I am not using a high protein flour.

The dried nonfat milk powder is likely in the recipe for flavor.  I would instead use milk in place of water and either up the flour as needed or replace with flour as needed (you can tell this during kneading).  I've done this just fine in bread recipes before.