A tag is a word or phrase placed inside your hub that allows other hubbers to search or it. As an example, if I write a hub on fly fishing and place 'tackle box' in the hub as a tag, then anyone that searches hubpages for 'tackle box' will find my hub ... and possibly others.
Note: The tags are not actual internet keywords, so they won't work to seed Google searches. However, the words you write inside of your hub can be seen by google as keywords, so it's wise to write your tags into your hub naturally (meaning, don't force them in ... add them in where they would be found in a normal article).
I hope this helps. :)