Tags are a way in which you can record areas of interest against your contacts.
There are a number of ways in which contacts can be tagged.
The tag manager (contacts > tags) allows you to view, edit, and delete your tags. In addition, it reports on the number of contacts currently with a particular tag.
The link manager modal offers a tagging option; any selected tags will be applied to contacts when they click the link.
You can schedule an email to be sent to all contacts with a particular tag.
Tags can also be used to personalise email messages. You can specify that specific blocks of content are only sent to contacts tagged in a particular way.
Tags are not simply on/off flags, instead they store a number indicating how many times a contact has received a particular tag. When you look at a contact's profile, you can see that tags are used like scores to help describe the contact in more detail.