Glad to see you are taking the inlet tube out of the water.
Other tips:
As Nick said, use smooth tubing...3-4" PVC works fine.....and smooth radius turns. PVC comes in 90 degree Ells as well as larger radius swept Ells. The curved ones will work better. There are special hoses for dust collectors with fairly smooth inner walls. Once the debris gets trapped in the water trap, the air will have much less particulate and won't be getting dirt in the hose, but turbulence created by rough walls can slow down the air flow, and make the unit much less efficient.
One big problem is your source of suction. A shop vac is not really made to run for long periods, and is not the best choice for a dust collector system.The noise level alone would make me not use one. Also, the reduction in duct size from a 3-4" duct to a 1.5-2" vac input will greatly reduce the air volume, and create a pressure drop in the duct. A blower from a HF dust collector will work much better. Toss the bag and keep the blower. They are often for sale on Craig's List and the Trader papers.
There are a couple ways to deal with your desire to make this a constant air filter -
Change the shop vac to a two speed blower setup. That way you can run it slow when not grinding, and fast when making sparks and dust.
Or, have two blowers. One should be a real blower as described in the previous paragraph, and the second a smaller vent fan box ( like a bathroom fan). Place a selector gate valve in the air duct to switch from one to the other. Make the bigger blower the one with a straight shot down the duct.
In either case, there should be nothing...repeat NOTHING... in the duct path from the pickup port to the water tank.
Place all air movement devices after the trap.
The best way to have a good spark/dust collector as well as a good shop air filter is to have them as separate units. You can purchase a dedicated shop air filter from Woodcraft or other suppliers that constantly filters the shop air.
Right now they are on sale for less than $300. They really work well.
http://www.woodcraft.com/Product/2004673/7332/Jet-Air-Filtration-System-Model-AFS1000B.aspx
It runs quiet.
A $300 air filter plus a $100-200 dust collector blower and $100 in duct/hoses/fittings/tanks will total about $500-600. That is a good amount...but it will keep your shop and your lungs much cleaner - and that makes it a good deal. If you have other family and pets that breathes the same air as you do, the price shrinks greatly in comparison to the value.