Tags are a mean to organize / categorize your photos. Multiple tags can be assigned to a a photo and a tag can be assigned to multiple photos (N:N). This provides a more flexible way of looking at photo sets than albums.
The current implementation with a categorized list of tags with icons.
I feel the sidebar for structured tags (categories) is overengineered and doesnt scale in terms of the interface. Being able to assign tags in the style of del.icio.us will be much more efficient.