As far as I know the Mute function on an iPhone has always been controlled by a physical switch, and there has never been an electronic over-ride. This has changed slightly in the last few weeks with the introduction of the Action Button in iPhone 15 Pro, but the Mute function still appears to be local to each individual device. Even in the latest software there is no configuration to enable, and Mute is not propagated between iPhone 15 pro and Apple Watch.
I suspect you were thinking of the Do Not Disturb function, or Airplane mode. Both can be linked and mirrored between a paired watch and iPhone.
Having the ability to mirror Mute between devices would be nice, but on current models it would only be available for the iPhone 15 Pro range which uses electronic switching. Post your Wishlist entries direct to Apple's product teams using the appropriate product Feedback pages, Product Feedback - Apple