index whichever path you have optimized for and un-index everything else. So if you optimized the categories uncheck it but check un-index tags, menu, archives etc, etc.

(I use the category in the URL, so even though I do not index the categories, the category keywords are in the URL anyway no matter what path they take to get there.)

I use both categories and tags as keywords for the blog posts. Both are checked for index.

you can use categories or tags to index, one of them!, don't index both of them that will cause you a duplicate content ! if your categories names as your tags

In your case, you need to index category also. But the problem is the duplicate content. Most themes, even the premium themes will display exactly the same page between the category and the tag. That's the reason why the all in seo pack has "Use noindex for Categories" checked by default.

You need to change the archive.php code so the category and the tag pages will display different content, even if you give the same name to them.

Soon I will release a service in the warrior for hire forum about complete wordpres setup.
Including this duplicate content issue solving.

No index tag is really used to avoid the duplicate content and useless pages to rank on Search Engine. It is used to prevent the categories to index in Search Engine.It provide you ability to control the flow of Page Rank.

This would only matter if you do NOT have excerpts on the category/tag archives. IMHO. Usually, you have a noindex EITHER on categories or tags...but if i call up mysite .com/category/whatever it should only show some short excerpts of the actual posts. Depending on theme of course.

Its a problem only if you do NOT have a noindex on your category pages and your theme would show FULL posts on archives (categories/tags etc.. archives)..because then you would have dupes on your actual posts and the same posts appearing in the category archive.

Whenever you ask this question about whether to no-index your category pages and tag archives. You will surely get 2 kinda reply, some will say to index and some will ask you to add no-index. Every single forum and every single thread about this issue, you will find contradicting replies.

I was extremely confused before now have come to my own conclusions and it works.

1.Honestly though, you want Google to crawl your tag archives, or it has no other purpose than improving site navigation. But you need to keep in mind that you need to have only excerpts in the tag archives. If you are having full post on the archives pages its gonna be bad(duplicate content). EXCERPTS are must for tags and category pages if you want Google to index em.

2. Don't add too much tags, it will surely piss Google. My general rule of thumb is 3 to 4. Reusing tags for multiple posts is also recommended. For instance, if this a wordpress post, i will be adding tags like 'no-index tags wordpress','no-index categories wordpress','configure all in one seo plugin'. Or stuff like that, don't add more by mixing the words around, take a few more seconds while writing a post and come up with tags that makes sense.(Experts forgive me, i'm writing this for noobs, so have to be detailed).

3. Categories: If you want to index Categories you need to keep an important thing in mind. See, how much categories you have and how much sub-categories you have.
Say if i have a category called Automobile and a sub category called bikes. If i post any thing is 'bikes'. It will also show in Automobile category page. So if you have lot of sub categories under every primary category, you don't want Google to crawl. So it all comes down to how much categories you have and how the category hierarchy is.

On a side note, i do add no-index to a pages like the general archives(Date based) and author pages, login page.

Hope this helps.

Peace.