It's because the Nexus 7 uses a crappy digital volume control that simply reduces the volume of the digital waveform before it hits the DAC, instead of having a real analog volume control -an op-amp that adjusts the volume of the signal before it hits the headphone/speaker amplifier.
What you're hearing is quantization noise as at the lowest volume the audio uses only 2-4 bits of dynamic range instead of the full 16 (or 24, dunno what DAC is in this thing). It's the same as the bit-crushing effect you hear in some dubstep and other electronic music that degrades the audio into a robotic crunchy mess, only here it's not on purpose, it's just cheap design.
There is nothing you can do about it.