TOR Protects your "identity" on the internet by introducing additional steps between you and your destination. To get to example.com, for example, may cerate a connection chain like this:
you -> internet-router-1 -> internet-router-2 -> example.com
i.e. you go through internet-router-1 to get to internet-router-2 to get to example.com. Without TOR, the routers forward your IP address (identity) to example.com as the requesting IP address.
If you use a normal proxy server, the connect chain becomes:
you -> proxy-1 -> internet-router-1 -> internet-router-2 -> example.com
And the traffic appears (from example.com's vantage point) to come from proxy-1, not you (because internet-router-1 knows nothing about you, proxy-1 was talking to it).
The only real problem with this set up is that the owners of proxy-1 may give up (either willingly or though coercion) connection information, to clarify to someone that traffic to example.com at such-and-such-a-date actually came from you.
TOR alters the set up by introducing multiple proxies that are chained together, using encrypted connections:
you -> tor-1 -> tor-34 -> tor-1156 -> example.com
TOR also introduces randomization, so the connection path is different for each subsequent access:
you -> tor-1 -> tor-34 -> tor-1156 -> example.com
you -> tor-34 -> tor-2 -> tor-1156 -> example.com
you -> tor-1156 -> tor-34 -> tor-3 -> example.com
The encryption between TOR hops (tor-1 -> tor-34) makes it very difficult for eavesdroppers to determine what sites you are accessing through TOR, and the randomization hops make it difficult for your steps to be retraced by TOR staff (should they ever be coerced into giving that information up).
So, in a nutshell, yes, but only for traffic patterns. Tracking cookies and such are an entirely different issue and proxies are not involved.
