A taxonomy is a group of terms. We learned about taxonomy when we first studied biology and the classification of living things. This is a hierarchical taxonomy. Each subcategory is contained in the category above, so the leopard is also a panther, a cat, a carnivore, a mammal, a chordate, and an animal. In WordPress, categories are a hierarchical taxonomy.
Even though tag clouds show the frequently-used tags in a larger size, WordPress tags are a non-hierarchical taxonomy. All of them are on the same level.
WordPress has four kinds of built-in taxonomies: Post Categories, Post Tags, Navigation Menus, and Link Categories. You can do a lot with that, but there are times when you want to add your own taxonomies so you can classify things more specifically, say a recipe site, or a movie or book review site.
WordPress has five kinds of built-in content types. Most people are familiar with posts and pages, but you also have media attachments (anything you can upload through the media uploader), post revisions, and navigation menu items.WordPress 3.0 makes it much easier to register custom content types, which can act either like pages (hierarchical) or posts (non-hierarchical) . This makes WordPress act more like a traditional Content Management System. You can either code your own custom content types, or use a plugin like Custom Post Type UI (http://wordpress.org/extend/plugins/custom-post-type-ui/) or GD Custom Posts and Taxonomies Tools (http://www.dev4press.com/plugins/gd-taxonomies-tools/features/), which is what I used to make these screenshots.