Actually, you get a bonus to xp earned when in a group. You only take a cut if you're grouped and gaining xp in rested form. If you check your combat log you can see that you're actually getting a bonus and not a cut (itll say in blue, and in parentheses +xx grouped bonus).

its about stopping people powerleveling their characters. blizz wants people to take their time as they level up but without the penalties most people would just get in a group of 5 and burn through hundreds of mobs as quickly as possible.

Yes, Strahl, there is a cut. The bonus you mention is applied afterwards. Basically, for a group of 5 people at the same level, the XP gained from each kill is divided by 5, and then group bonus XP is added. So the group as a whole is gaining more xp over time than they would if each individual member spent the same about of time killing other things solo. The ratio changes based on level, however, with higher levels soaking up more xp, even if the mobs are grey to them.

From WoWwiki:
1 person group = 1.0
2 person group = 1.0
3 person group = 1.166
4 person group = 1.3
5 person group = 1.4

Then divide by the number of members of the group. (Effort is divided equally, xp is also divided equally.)
The real penalty for groups, IMO, is that it's based off the highest level guy there. The Base before modifier can be noticeably different if there are a few levels different.