Does a VPS need a firewall?

I recommend following the IPTables guide on slicehost. They have a good basic rule set that allows incoming SSH, HTTP(S), and ping while allowing your server to send anything out.

These guides also help you to setup just about everything else you could need in a VPS so you should really take some time and read them. http://library.linode.com/ is also a great place to read up on these things.

Security is best done in layers. Aside from a little extra work adding a host-based firewall to your VPS shouldn't hurt anything and may protect your system from some attacks.

Iptables is a command line tool that manages the rules in the kernel netfilter infrastructure. Almost every linux-based firewall uses iptables. You could say there really is only one Linux firewall, just lots of tools that manipulate the rules in different ways.

As for which firewall to use personally I really like firehol, but there are many alternatives a search for linux firewall will return many questions where various firewall management tools are discussed.