It looks like Google Reader always tags every post if it's in a folder. So is a folder always a tag and all the functionality like a regular tag?
Yes. Google Reader's folders is just similar to GMail's labels. But this is just one of the ways in which you can group your subscriptions in Google Reader.
With folders, you can easily place a given subscription into it by going clicking Feed Settings (located at the top right) and choosing the appropriate folder.
If you'll notice, there is also a dedicated 'add tags' link at the bottom of each content. This one is the more common interface for adding tags to posts.
From the Google Reader FAQs,