Tor helps you become anonymous online.Every time you use the Internet your information is being collected by third parties. In the US, this often means when you visit a website, advertisers are capturing data about what ads you click on and what information you search for to serve you more targeted ads.
In places like China, all traffic going in and out of the country is monitored. Certain website are blocked and the content of your messages (email, forums, IRC) is monitored by a legion of net nannies.
Whether you're worried about advertisers capturing your info, or preventing the government from snooping, Tor is an excellent solution. Tor, "The Onion Router", is free open source software that provides you with anonymity online.
Tor works by distributing the source of your traffic across a variety of exit points, so that your computer cannot be associated with the final destination. Just like the layers of an onion, Tor provides several layers of encryption -- one encrypted layer to each relay along the path that you're relaying traffic through.