1. That is, in fact, exactly how the system will work. Multiple categories will be allowed for a single tag, so you can translate the tag "Lieder" into "[[Category:Lieder]][[Category:Songs]]".
2. Technically this is possible (and in fact most likely will be implemented in the near future), though it will not be the case at first. My objective for January is to implement the minimum necessary for some significant usage of the tagging system. There will be much room for improvement, but we will have laid the groundwork, which is the most important. Insofar as usage in January is concerned, the "category walker" will be a very basic thing: it will list all
categories included by the pages under the "root" category, even when these categories are not tag categories (though this may actually be a feature, e.g. composer categories under Work type/Instrumentation combo). Future improvements will be (a) separating the categories into "Instrumentation", "Work Type", "Composer", etc., (b) having a hierarchy view (like your example), (c) the combination system you want. These are not small features, so I do not want to take up too much at once in January. I want to make sure that the basics are down before doing fancy stuff
However, rest assured that it is very technically possible, and will almost certainly be implemented in the not-so-distant future.
Re: abbreviation. I have no problem with not having abbreviations if you don't think they are helpful. I was just thinking that, since there is a standardized instrumentation abbreviation system that you could use it (e.g. Songs / 4 v + 2 vln + vla + vc, Sonatas / cor + pno). But this is your decision.
One thing I will warn, however, is that you should really avoid plus signs or ampersands in the actual category name (it is ok to use it in the tag because that is not the category name). Technically they work, but realistically they break more than they work, and there is no real need for them anyway. In fact, I may consider banning plus signs and ampersands from tag category names anyway. Basically just do something like "*4 voices + 2 violins + 2 violas + cello|4 voices, 2 violins, 2 violas and cello" on the TTP (tag translation page), and you are fine. The pipe sign (|) separates the tag from the translated category name.