The tags are saved using the default encoding of your database.
They are also displayed, using the default encoding of your Joomla configuration. This is actually in the language file in Joomla1.0.
The tag component does not assume any encoding, so it is up to you to set the correct character encodings.
I would be able to help if provided:
Joomla Version
Database Encoding
Joomla Encoding
URL of website.
I did not install it yet on my live site, I tried it on my local server.
Joomla 1.0.15
Db Encoding: From phpmyadmin it says Swedish (but Arabic shows all right on the site) and I think this is a common thing in phpmyadmin with "Eastern" languages.
Joomla language pack: Arabic (windows-1256 encoding)