How should I highlight extensive changes in a revised manuscript?
If the editor's already asked you to highlight the changes, then you should highlight the changes even if it's 85-90% of the text.

As for color tags, it's up to you. Both are equally good. I would highlight on the PDF since I find it easier to do, but if you prefer color tags that's just as good. Be sure to pick a color like red or blue - something that makes it easy to discern the changes from the rest of the text.