TL;DR: OP's has a point. It is inconsistent to use proper time $\tau$ as a world-line parameter before performing the variation in the stationary action because not all virtual paths are parametrized by their proper time. Only after the variation has been performed, and the Euler-Lagrange (EL) equations obtained, it is consistent to use proper time $\tau$ (of the solution curve) as a world-line parameter, cf. e.g. my Phys.SE answer here.
More details: In this answer we focus on the middle term in eq. (7.5) since the first & last terms are only spectators to OP's question. MTW explains on the previous page 178 that $\lambda$ denotes an arbitrary world-line (WL) parameter, while $\tau$ denotes proper time.
More generally, the "master" action for a relativistic point particle is
$$\begin{align}I[z,e]~=~&\int_{\lambda_i}^{\lambda_f} \! d\lambda~L,\cr
L~=~&\frac{\dot{z}^2}{2e}-\frac{e(mc)^2}{2}, \cr
\dot{z}^2~:=~&g_{\mu\nu}(z)~ \dot{z}^{\mu}\dot{z}^{\nu}~<~0, \cr
\dot{z}^{\mu}~:=~& \frac{dz^{\mu}}{d\lambda},\end{align}\tag{A} $$
where $e(\lambda)>0$ is an einbein field, cf. e.g. this related Phys.SE post. This action (A) has WL parametrization invariance.
The usual square-root action [that OP implicitly mentions in their last expression] can be recovered by integrating out the einbein field $e$, cf. e.g. this Phys.SE post.
If we instead fix a gauge
$$e(\lambda)~=~e_0~:=~\text{some constant},\tag{B}$$
then the action (A) becomes proportional to MTW's middle term (7.5) [up to an irrelevant constant term $-\frac{e_0(mc)^2}{2}$ in the Lagrangian]. After the variation, one may relate the WL parameter
$$\lambda~=~\frac{\tau}{me_0} + \text{constant}\tag{C}$$
to proper time.