On typewriters, the tab key moved the carriage to a fixed horizontal position, marked with a tab stop. This allowed typists to create columns of text or numbers, also known as tabular layouts (hence the name tab).
Tabs and tab stops still work the same way. A tab stop marks a location; typing a tab moves the cursor to that location.
These days, the tab is used only for inserting horizontal space in the middle of a line. If you need horizontal space at the beginning of a paragraph, adjust the first-line indent. For a true tabular layout, use a table, not tabs.
The tab is not as vital as it once was, but word processors still shortchange its capabilities. A new word-processing document has default tab stops every half inch. These default tab stops exist so that something happens when you type a tab in the new document. But this default behavior also suggests that what the tab key does is move the cursor a half inch at a time. Not true.
To get the most out of tabs, you should set your own tab stops. Avoid relying on the default tab stops — they undermine the goals of control and predictability. As with word spaces, also avoid using sequences of tabs to move the cursor around the screen.