This debate is very modern-times, as the idea of "Santa Claus" is becoming more and more of a controversy. There are multiple arguments that have been laid out on both sides as to whether a child should believe in a man obsessed with milk and cookies that lives in a fantasy land and flies through the power of flying reindeer. As a disclaimer, this article is not meant to persuade any parents one way or the other, and it is not strictly religious, even though that's one of the arguments involved. This is simply to lay out both sides of the argument and show where the controversy is coming from.
So let's just get this one out of the way, as it is the most controversial. For anyone believing in a Higher Power, it may be hard to swallow the idea of Santa. Particularly because the whole premise of Christmas is to celebrate the birth of Jesus Christ himself (hence, Christmas). So for a parent who practices religion, there is always the choice of allowing the children to believe in fantasy, or to allow their children to fully embrace Jesus Christ, even though kids at school are talking about Santa.
Psychological Aspects (Pro)
Quite obviously, it's ideal to let a child's imagination roam, and keep their brain active at all costs. Coming from a psychology major, it's something we discuss every winter term, as it's something to strive for with children. Activity is how the brain grows and adapts, so it's best for a child to believe in fantasy and make-believe for as long as socially possible.
Psychological Aspects (Con)
The ominous "but." So, as great as imagination is for the development of the brain, there can be trauma involved if it isn't handled properly when children finally realize that you are Santa. If they find out too early, it may be a traumatizing event with lasting repercussions.
There are pros and cons to this as well, since it really can go either way. If your child does not believe in Santa Claus, there's no risk of some kid at school telling them about Santa before you can handle it with kid gloves. However, they may be ridiculed for not believing, as it is not a social norm.
Really, the decision is up to the parents and their way of living, but keep these in mind when it comes to Santa Claus.