Tags are keywords, separated by commas, that you enter so if someone is on your blog and wants info about a particular subject, they might can find it in the tag “cloud”. Each posting should have 2 or 3 tags which you can also think of as keyword. A single tag can be one word or a 2 to 3 word phrase, like “tags on wordpress”.
Over time, your tag cloud will get bigger and the tags you use most often – which should correlate to your most written-about topics – will appear bigger.
On my blog, the last time I looked, “SEO” was listed prominently in the “tag cloud”. A visitor to my blog can click that word and see a list of the articles that I tagged with “SEO.”
Tags are important for search engines being able to index your blog and, more importantly, for your readers. Use them, but don’t abuse them.