What is the difference between tags and folders in Google Reader?

Google Reader has the concept of folders and tags. What is the difference between these concepts?

Should I group my subscriptions by folders or tags?

From web app Brad Leach

• See this support article.

  Folders are for subscriptions, tags are for feed items.

  From Simon Brown

• You can apply a tag to any single item in a subscription. If you place a subscription in a folder, all items in that subscription inherit that folder name as a tag.

  A tag will become a folder if you put a subscription in it.

  You can apply a "folder" to a single item just like a tag.

  When you click on a tag you'll see all items marked with that tag.

  When you click on a folder you'll see all subscriptions in that folder as well as any single items tagged with that folder.

  It's all very confusing, really, but very easy to change as you decide how to organize your subscriptions.

  From Benjamin