That kind of storage might somewhat work for media files and simple tags if you only view the files in the tag-aware file manager but what about other applications and files?

If the path of a file changes every time you add a tag or remove one that means the path of files is very unstable so you can't e.g. reopen the last used files in other applications easily. I also don't think this scales to the billions of files on a modern system. And of course any files required by an application to be in a specific place will be screwed up completely by this.

Maybe the tag directories should be hard links to the actual files instead?