Rules for Detecting Duplicates?

Is it possible to create a rule that scans a folder (and its folder structure) for duplicates and adds a tag "DUPLICATE." ?

Can you elaborate on what you deem a duplicate? A specific example would help here.

2 files containing identical contents/structure

Unless they are named similarly and in the same folder, then no, Hazel is not really meant for that.

To be fair, Hazel can do this but it would require you to write an applescript or shell script (or whatever other language you might know) to do well. And if you are just looking for files with the same name, that is relatively simple. Working with duplicates has been scripted many times and if you are willing to invest 30 mins, check out macsripter and search for what you want to do. Then you can set hazel as the watcher and when a file is added to a folder, you can set it to run the script.