I rreally can't see how that is being cruel - you can see the dog's tail wagging throught (even if you can only see the shadow of it) - maybe it's not nice to tease, but it isn't being cruel. I could easily have a similar conversation with Isla!
Dog tail wags do not necessarily mean happy, they can be an appeasement gesture or a warning of aggression. The ears are back, the dog is looking away and yawning, again indicators of worry and appeasement. Not nice, certainly not funny.