Yeah that is right. All you'd really need to make mute lists comprised of other lists work well for users is to have clients parse a user's mute lists in a recursive way – e.g. when they come across a list in the mute list, they'd need to fetch that list too and add the users/threads from those lists.
I don't know how many clients already do this...
nostr:npub1xtscya34g58tk0z605fvr788k263gsu6cy9x0mhnm87echrgufzsevkk5s nostr:npub1gcxzte5zlkncx26j68ez60fzkvtkm9e0vrwdcvsjakxf9mu9qewqlfnj5z nostr:npub1v0lxxxxutpvrelsksy8cdhgfux9l6a42hsj2qzquu2zk7vc9qnkszrqj49 ?