here’s a picture of one…
Just a WAG, but I’d say it probably has something to do with keeping balance on tree limbs and such.
I suppose as well as the balance thing, it also acts a bit like a parachute when they miss a jump and fall to the ground. It could also be one of those runaway sexual selection things - like a peacock’s tail.
In addition, I would wager that it’s to fool predators. The squirrel waves that big bushy tail, the predator lunges for it, and the squirrel just has to dodge and pull his tail out of danger.
You’ll also notice that not all sqirrels tails are equally poofy. Some are downright scraggly, and some squirrels I’ve seen with scraggly tails later sport beautious bushy ones, and vice-versa. Makes me WAG that it might be linked to nutrition, and possibly mate attraction. (“Hey baby, I got lot’s o’ nuts - check out my bushy tail!”)
But asking “why” of things like this doesn’t get you a clear answer. We can speculate, and we can point out things that are linked to poofy tails, but Og only knows for sure. Science likes to answer How and What, but doesn’t do so well with Why.
My girlfriend and I happened to watch a squirrel come within a foot of a cat lying on its lawn yesterday, and were really amazed that each one let the other so close. At first we were laughing at how pathetic a cat this was, letting a rodent get all up in his grill in his own house (for some reason we decided this was a hip-hop cat; don’t ask) then we realized that with the bushy tail up, the squirrel probably looked at least as large as the cat even though it probably weighed half as much. So in addition to BobLibDem’s observation I’d have to add they end up looking bigger to predators, maybe large enough for soliray hunters to think twice.
Ha Ha! “poofy tails”.
It’s funny in england - trust me.
And here I was, ready to make a Chip’n’Dale reference. 
You might as well ask why other animals **don’t **have poofy tails. It’s a random characteristic that results in a slight survival advantage and no survival disadvantage.
But the word “why” implies that there’s some sort of conscious intent involved, and there’s no evidence of that.
reminds me of a saying i heard once:
rats are a poofy tail away from being hand fed in the park.
Was that an intended double-entendre or is it just me?
But I thought you Brits pronounce it “poof-ta”.
Or did I misunderstand Monty Python?
As long as it wasn’t a Chippendale reference!
Some answers:
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Squirrels are city animals – so perhaps the “poofiness” is actualy them being Metro!
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More seriously, the tail is used (a) as a balance and “airfoil” of sorts when they are running and jumping, and (b) as a means of insulating their extremities – muzzle, limbs, etc., when they are curled up and resting. These two benefits would seem to have produced a natural selection for poofiness of tail.
Note that it is primarily the tree squirrels that have the big, bushy tails. I would suspect that tail bushiness has little to do with balance, as the tail will weigh the same whether it’s big and bushy or the fur lay flat. More likely, the bushiness helps increase drag when leaping about in the trees (or, on occassion, falling from them). In this way, it can also help act as a rudder during such leaps. It also helps in signalling, keeping warm, predator distractions, and all of that.
I once observed a squirrel running across a telephone wire to a pole on which a medium-sized hawk was perched. The fearless little bugger came face to face with the hawk, and the latter actually recoiled. The squirrel went on his way unscathed.
It’s the pants.
Would that be the Eastern Ghey Squirrel? 
Squirrels use their tails not only for balance, but for a blanket in the winter. (There’s nothing cuter than a curled-up squirrel.)
They also use their tails for communication. They flick their tails when other squirrels approach as a warning to stay away.
The “poofiness” of a squirrel’s tail is pretty extreme – there’s a lot f apparent bulk with very little actual substance. I find i ard to believe that it helps either with balance or with keeping warm.
I’ve long been covinced that it is intended to fool predators. Watch the way a squirrel moves – that tail follows the movement of the body in front of it. Any predator trying to grab the squirrel is likely to miss the body and grab the tail, ending up with a mouthful of fur.
Um, wouldn’t “a lot f apparent bulk with very little actual substance” be a pretty good standard description of materials that insulate temperature?