The setting in your first screen shot is used for setting the style of the category badge. You can see the effect it has by changing the value of the setting. The category badge for the selected style will be displayed for you.
It’s not possible to have categories displayed in boxes without adding some fairly complex custom styles to your site. What Discourse does let you do is display subcategories in boxes above a category’s topic list. This is set on the Settings tab of the parent category’s edit modal. The setting you need to select is ‘Show subcategory list above topics in this category.’ When that setting is selected, you will see a dropdown menu that lets you select the subcategory style. Check out the howto category on meta to see an example of it.