Many People confuse Tags for Categories or a Subject but they are not. There are few things that keep them different from Categories and they make them more useful for SEO purposes than Categories, especially in WordPress. The most important thing related to SEO that makes the real difference is that Tags provide meta-information, Categories need not. Tags content some meta information as well as can be used as a label to filter certain kind of or type of messages or blog posts and put them under one ‘meta keyword’. Categories in WordPress can not do that atleast for the time being there are limitations.
Though there are few advantages related to categories that we can’t enjoy with Tags. Categories organize, hierarchically and Tags can’t. This is not very important for most of the bloggers who don’t need categories below the depth of one level (Most of us don’t in the real world blogging). So Tags are more important from the SEO point of view than Categories in WordPress, but that is may be not true for all other blogging platforms or CMSes that we need to optimize for Search Engines.
There are few good wordpress articles that can help you to understand the Tags better, few of them are listed below:
Tags have many advantages over categories, as they can describe your blog post in more detailed manner than a category ever could. You can have more number of Tags so more ‘keywords’ and the number is not limited so you can have as many Tags as you want. Tag clouds can give a visitor of your blog a visual idea about what is discussed the most in the blog or the blog is about what topic or topics and hence can generate more traffic for you.