Getting a Uno Outcast from Bike Island. Can I switch the 700x38c to 700x32c?

The bike as a whole isn't that exceptional and please don't be fooled by the fake price they list the price was never anywhere near 800 and will never climb that high. However ride the bike and the tires till you need replacements if you are deadset on that bike. The tires are tires that make sense on that bike it is a low initial cost single speed with a bought name to give it some prestige. It is a serviceable bike and totally rideable but it is so mired in marketing hype, that isn't even fun or cool, that you could easily be mistaken it is the best bike on the planet.

Why go smaller on the tires?

fitting a 32 tire won't be an issue. I've got the drop bar version, the bike has its issues but its also fun. Get new pedals, mine lasted less than 5 miles before the plastic split off the metal spindle. The weight is chunky, that all steel fork is heavy and there's not a lot of good alternatives for it. Crank is heavier but fine. Biggest issue I have with it is that it uses a 120mm rear hub, that size in disc offers no good alternatives. I've since rebuilt the hubs with some carbon rims I got cheaply and some butted spokes and alloy nipples, its still a 24lb bike. However, I've ridden all over NYC with it, through queens, brooklyn, manhatten and the bronx and always enjoyed the trip. I can toss it in a travel bag and take it off to St. Louis and enjoy kicking around there without worrying about damaging an expensive bike. In Dec I raced SS in cyclocross nationals in Louisville and the geometry saw to it the bike handled just fine through all the tight corners. Its often the first bike I grab to head out the door to go run errands; simple, comfortable, and handles well. It isn't a great bike, but its a nice bike, enjoy.

Yes, but I can't see why you would. You won't go any faster.