Drupal's taxonomy system is one of its most powerful features and also one of the more tough things to wrap your head around.  Taxonomy can be used to categorize content -- tags that identify what the content is about -- and this can extend to showing only content that fits that category.  For example, you could identify books by subject matter and then on different landing pages only show that kind of book.  Taxonomy leverages the power of labeling and that power can then be let loose using merlinochaos' excellent Views module.

My minor nit with Drupal's taxonomy system lies in its UI.  Managing vocabularies occurs on multiple windows.  For example, adding many tags at once is a pain.   Taxonomy Manager is a contributed module by Matthias Hutterer and was created through the Google Summer of Code program. 

The Taxonomy Manager supports operations like: * mass deleting * mass adding of new terms * moving of terms in hierarchies * merging of terms * fast weight changing with up and down arrows (and AJAX saving) * AJAX powered term editing form * simple search interface * CSV Export of terms

In short, it greatly simplifies managing vocabularies.  It provides an far more intuitive place to add, move, change, and manipulate terms.  If you are working with parent and child terms (especially when the children have multiple parents), this offering will help you in visualizing what those relationships look like.