I completely disagree with this based on my experiencing working with several companies who moved to Google Apps. Some of these companies are small businesses (10-25 employees), but some are large organizations with hundreds of employees and retail locations around the country.
The problem with tags as pseudo-folders is that it breaks a core promise of "folders". Folders are a metaphor, and when you use a metaphor like files & folders, you're making a promise to the user. You're saying: "I'm making these things familiar to you so that you don't have to learn a new behavior."
To be clear, I have no problem with tags, and I do believe that the standard "hierarchy of folders" we use today is untenable with the volume of documents we generate, but extending folders is a bad idea.
The reason this breaks so badly is that users expect to preserve the basic move/copy dichotomy of a file/folder when we represent items as such. This expectation is rooted in the metaphor of a file or folder in the real world. I cannot place a physical document in to two folders without copying it. When I copy the document, changes made to the replica are not retroactively applied to the parent.
I have seen many Google Docs users lose hours of work because they used the "collections" feature of Google Apps incorrectly. An example, I've seen plenty of users do the following in an attempt to copy a file to a new collection in Google Docs:
* Locate an item that is already in a Collection
* Check the item in the Document List
* Click the "Organize" icon (it's a folder)
* Check the box next to another collection where they want the copy
* Click "Apply Changes"
The vast majority of the users I work with assume that the "same" document cannot exist in two places at once. They assume this because that is the way that files & folders have always worked. If an action results in the appearance of two documents, there are two documents. The item has been copied. It doesn't matter whether the language "copy" is used. The action is implicit in the learned behavior of files & folders.
Tags should be called tags. Users are smarter than you think. As engineers, we might be frustrated by the assumption made above, but in reality, the user is drawing an inference based on past experiences. They're applying conceptual knowledge that we taught them. That's "smart".
Implement a tagging system in a way that solves users' problems and they'll flock to it, but don't make it opaque by masquerading as something they already know.