Since I have the L-2 sword from collecting the sea shells (and thus double the power of the L-1 sword like the Piece of Power?), I chose the blue tunic from the color dungeon so I have both double offense and double defense. But what if I picked the red tunic AND had the L-2 sword at the same time? Does that quadruple your sword power?
Yes, but there are so few situations where this actually produces a noticeable difference that it's mostly irrelevant. The only ones I can think of are the lv. 7 boss, one phase of the final boss, and those little mummy guys. I'm pretty sure those mummies are the only generic enemies that can't be killed with a lv. 2 sword spin attack.
So all in all, I think the blue tunic is the better choice. Still, the red can be fun to play with... there's a certain satisfaction in launching enemies across the screen :) --- I know you believe you understand what you think I said, but I'm not sure if you realize that what you heard is not what I meant!!
Also, if you have both the L-2 sword and Red Tunic, getting a Piece of Power doesn't stack to give you 8x power. Like the above poster said, it's really not worth it in the long run to have both. However, before you get the L-2 sword, the Red Tunic is better than the blue imo.