Agreed! I didn't once think of horse masturbation. Seems to me, that the person who DID think of that is the one who has deep issues. Palladin is assuming everyone thinks like him. Clearly, that is not true.
It's not even at that level - however, because of the way Laura told the joke - first saying George tried to milk a horse ... and then adding it was a male horse, she took it to where there was a dual inferrence. Because of the way the joke was written, I think the joke writer meant the dual inferrence to be there. Your opinion may vary - but others can have the opposite opinion and it is not their fault, but the joke writer's.
(Well, on the other hand I joined during the Lewinsky episode, so I guess the more things change, the more they seem the same....)