FAR 91.215:
(c) Transponder-on operation. While in the airspace as specified in paragraph (b) of this section or in all controlled airspace, each person operating an aircraft equipped with an operable ATC transponder maintained in accordance with Sec. 91.413 of this part shall operate the transponder, including Mode C equipment if installed, and shall reply on the appropriate code or as assigned by ATC.
As a controller in a sometimes very busy D tower, having mode-c is often a big benefit in identifying your aircraft on the control tower radar display.
There are a few different reasons for this:
1) The altitude filters are set to show mode-c for a/c from the surface to 5,000 AGL. If you are flying around without mode-c, it's very hard to tell at a quick glance if your target is actually you, or someone flying overhead above the filter.
2) When you call up 12 miles southwest inbound, I'll glance out that way on the radar, and there are often times numerous a/c in your vicinity. Some of the controllers in the tower will ask you to ident, but I find this often takes 10+ seconds to identify which plane is which. Instead, I will usually (90% of the time), ask you to "say altitude", and use that to get a good guess at who is who.
3) Again, if you call inbound from the southeast, and I have a departure also going southeast, I will have to watch to make sure that isn't a conflict. Pointing out traffic is time consuming and doesn't guarantee that you all won't hit. One of the easiest ways for me to ensure that separation exists is to observe your mode-c as 1200 descending and the departure at 1700 climbing, or something similar. If you don't have mode-c, you suddenly become a traffic conflict for every other aircraft in your vicinity, regardless of altitude.
4) Mode-c equipped aircraft "pop" off the radar screen much more readily. Almost every plane we're working has a little altitude readout next to it. I spend most of my time looking out the window and with binoculars, and only occasionally glance at the radar screen for a second or two, much like an instrument scan in IFR conditions. If yours is the only a/c out there without an altitude readout, it's just naturally going to be harder for me to pick it out.
So yeah, always use your mode-c, and don't get offended if the tower tells you "be advised, not receiving mode-c". We both know the regs say you can legally fly in our airspace without it, but I'm still going to remind you to reach down and turn that knob to "Alt" when necessary. It's safer for everyone involved.