The hardware supports 16 million
The OS supports 16 million

for performance, the OS is running the hardware at 65k colors.

It would be an interesting experiment to see how it performs running at a 32 bit depth, but not that interesting.

Note that even if X is running at 16 bit, it should(/might/I can't really remember anymore) be possible for an app to directly access/set the hardware framebuffer and display video/images at 32 bit depth.