Tags provide another level of filtering within a collection. Tags are associated to the products themselves, which means a tag will only appear when there is at least one product in that collection that has that tag.
For example, let's say you have a collection called Grassfed Beef and you have a Ground Beef product in that collection. If the Ground Beef product has a tag of "Ground" then your customers will see a "Ground" tag when browsing that collection. When they click the tag they will only see products that have that tag and are in that collection.
Tags are basically a way of filtering products within a collection and can be useful when a collection has lots of products.