By this metric, the distance between levels becomes smaller at the higher levels of skill.

Probably not by very much. One of the main motivations behind the grading system is to allow people of different grades to easily calculate the handicap needed to produce a fair game - e.g. see here:

Skill in the traditional board game Go is measured by a number of different national, regional and online ranking and rating systems. Traditionally, go rankings have been measured using a system of dan and kyu ranks. Especially in amateur play, these ranks facilitate the handicapping system, with a difference of one rank roughly corresponding to one free move at the beginning of the game.

You may be right that the system is flawed - but I don't think it is hugely flawed.