Yeah, I'm with Michael on that - the perceived size of the target is only part of the challenge that distance provides. There are things like bullet drop and general inaccuracy of the gun - they don't shoot exactly straight, or even non-straight in exactly the same way every shot. More than that, any slight tremble or twitch or slight adjustment of the shooter can more dramatically impact the point of, well, impact, the further away the target is, making it difficult to keep your gun aimed at a distant target, especially when it doesn't have the common decency to stay still for you.
So, yeah, I can see the argument for it to be able to reduce the penalty by more than one category, but not completely eliminate it.