Given the rename to "Folders", the feature defies expectations by not allowing hierarchical organization.
"tags" and "folders" are orthogonal: an item may exist in only one folder (baring links) but multiple tags can be applied to a single item and a single tag across many items. Tag hierarchies / subtags are an extra feature of tags but not core to the concept, so flat tagging was at least correct... Folder nesting is quite integral to the modern understanding of a folder(-tree, implied), so the folder branding is just wrong.
Perhaps "heading" or "group" would be a more apt name: it's a flat structure, and an item may only be under one heading -- makes more sense. Perhaps "category" or "collection" would also work, but they have a bit more meaning that doesn't fit the thread organization feature as it stands.
Flat folders is just kinda bad; the worst of all worlds. Folders are indeed inferior to even just flat tags due to the ability to build logical search queries with tags. Nested tags are even better than flat tags because they can be used to convey hierarchical categories and even simulate folders if needed. But truly, folders and tags are two different axes: one is a "where" and the other a "what"; folders can convey structured hierarchical locality, while tags describe aspects of identity or attributes (which can have their own hierarchies, but that's not mandatory). You can try to make one work like the other, but it's messy.
What we currently have is neither.
TL;DR
IMO either another rename is needed, or folder hierarchies should be implemented. Ideally implement both folders and tags, but whatever.
