Well I'm certainly no expert on the subject, but I recently had the exact same dilema as you (I'm in the process of building my first cabinet).  A friend of mine had MAME running with S-Video hookup to a TV so I went over to check it out.  After trying several different games, my mind was made up -- go with the TV.  The picture is much more like the original games were.  Plus you get an extra 4-5 inches and it costs less money.  
I believe he was running windows at 640x480 and while it may not have been the crispest picture, it was certainly much better than I expected.  Even games with bizarre resolutions like Toobin played fine.  I also imagine PC games would run fine at that resolution (didn't try it though), although I personally prefer at least 800x600 for first person shooter games.  Another benefit with TV is that console emulators look absolutely incredible on a TV -- he hooked up his NES and Sega emulators and I was sold.
The only problem I found was finding a TV around that size with S-Video that would fit in my cabinet!