In terms of GDP, I don't actually have the time to research, but I'd be interested in how many years ago we are now level with thanks to last year? My gut feeling is probably not that many years ago actually, so is GDP falling by 10% last year really that much of a problem? For the people who lost their jobs or businesses etc, of course. But as a country? I have to agree with one of the posts upthread, the only reason it is an issue for our country is because of the unstable and unsustainable idea of perpetual growth.
The problem, as you allude to, is that this isn't well distributed at all.
If everyone took a 10% income cut across the economy, you're right, most people would barely notice, because it'd knock on through everything.
Imagine someone's salary going from, say, 15k to 13.5k, and their rent, bills, etc also going down 10% or thereabouts. They'd definitely be worse off, but not fantastically so.
In reality what ends up happening is something like 5-10% unemployment (e.g. various sectors collapsing) whilst the other group barely notices or potentially makes more money than they did before.
(the percentages I use here aren't intended to add up to 10% of GDP, I'm just spitballing)
I've never been able to understand the idea that people may be saying to their company 'please don't give me that pay rise because I'll be paying a higher rate of tax on some of it'. You're still better off!
I'm not sure about the impact across the economy, but personally it plays out a bit more like this:
I can take a "hard" job and work say 40-60h plus have responsibilities outside of that e.g. on-call, weekends, etc, or I can take an "easier" job and work say 30-40h.
The way taxation works means that even though the gross salary might be more than proportional, the net hourly rate ends up being lower on the "harder" job.
Obviously earning more for the same work always makes sense; that's a different matter.
In a lot of ways though, this system makes sense.
It's better for two people to work 30 hours a week and make 50k each, than for one person to work 60 hours a week and make 100K whilst the other makes 0.
Better for societal cohesion (unemployment is bad), for the economy (propensity to spend decreases with income), inequality is lower, people are less knackered (I think that people who have to spend 100% of their time thinking about work are bad for society because they aren't able to meaningfully engage in the democratic process).
I'm not a huge fan of the way taxation works in this country, but marginal income tax is fairly reasonable.