Note that the tags option auto completes the vocabulary field with one of the terms we have created before.
If you choose terms from the vocabulary they will be displayed as tags on the page you have posted them as shown below:
Note that the terms presented do not indicate their underlying structure to the reader. The vocabulary just displays all terms for this content item.
The Drupal taxonomy provides a great way to manage the content sorting of your web site. Those are just basic examples and you can achieve amazing results extending the taxonomy vocabularies and terms for your web site.