For my themes Zukitwo and Zukiwi. Zukitwo/gtk-2.0/widgets/panel.rc
The first you'll see when you open that file is this: xthickness = 4 # The spacing (padding) inside and between applets. Add a lower value for a more compact look. Change 4 to a higher number. In other themes it may be located in the gtkrc file. Style classes can vary between themes. But this will fix it in my themes anyways.
Unfortunately there's a design miss by the XFCE devs. When that number is higher the icons in the panel will become smaller.
Thanks a lot for your prompt response. I've been searching for this for so long, I have no idea why people who also knew never responded or evaded the response. Says a lot about their character.