Categories are robust tags. The tagging system could be created under the category system by creating a root category called "Tag" and then creating sub-categories with the actual tag names. This is a cumbersom process, which is why the there is a seperate light weight tagging system. Categories also allow heirarchy support with as many levels as you want. Example: DVDS -> USA -> California -> Genre -> Action. Categories can be specified in the URL.
You have to first create categories on the category page. Once they are created, you can add them to the appropriate content.
You can add categories in batch or on a per content basis. Categories can be added in batch under the "bulk operations" widget on the "browse content" page. Categories can be added manually on an individual content item, by clicking on the "edit properties" link on the content page.