The whole point of Tifa’s oufit was to better contrast her with Aerith. She’s the quiet reserved one, whereas Aerith is the loud, bubbly one. Bear in mind, Tifa owned a bar in the slums of Midgar; looking slutty probably went a good way in keeping 7th Heaven and thus AVALANCHE alive for a while.
I must say though, I love how everyone hates on Tifa’s outfit. It’s definitely not practical, but that was probably what SE was going for. I know when I first played FF7, I totally didn’t expect her to be anything beyond Cloud’s friend. Then she joins us on a mission and kicks ass all over the fucking place.
If anything, I always thought Tifa was created to poke fun at games with even more blatant fan service: She was sexy, but was intelligent and could kick ass.