You actually have asked two separate “right or wrong” questions. One concerns whether it is right or wrong to tell a “little white lie” to a child if it brings happiness. Parents avoid telling their children the absolute truth all the time. Usually, this is done when the parents determine the child does not need to know the truth, or when the child is not mature enough for the whole truth, or even when the absolute truth would hurt or discourage the child.
For example, most parents will proudly display their child's crayon stick figure on the refrigerator door and tell the child it is the most beautiful picture they have ever seen. The truth is that it is not the most beautiful picture they have ever seen, but because they love the child and want to show support and encouragement, they do not tell the whole truth.
Honesty is a value, and values come into conflict. Honesty can lose out to a higher value. Look in the Bible. The Hebrew midwives feared God and refused to obey the king's order to kill the newborn baby boys. When confronted, they lied to the king and told him they couldn't get there in time. Exodus 1:20-21 says God blessed the midwives, and because they feared God, he gave them families of their own. In Joshua 2, Rahab boldly lied when asked about the spies. Not only was she saved when the city was taken, but she became an ancestor of Christ himself.
Still, what do we do with Santa? We make the decision based on the higher value. Some people see Santa as an embodiment of evil, the exact opposite of everything they believe Christmas represents. They see a figure who infringes on attributes God alone can possess—omnipresence, omnipotence and omniscience. He rewards children based on works, not grace. He emphasizes the joy of receiving rather than giving. He steals the glory of the holiday given to the birth of Christ. In short, they have no problem seeing Santa as an anagram for Satan. This evil endangers their child.
Others see a harmless figure who represents the joy of giving. They believe their children will have no trouble differentiating between the reality of Christ and the fantasy of Santa, the Easter Bunny and the Tooth Fairy. The fantasies are merely innocent stories that serve a purpose of entertaining and bringing joy to their children.
Which one is right? Is Santa an idol, or just a story? Unfortunately, there simply is no perfect right or wrong answer on this one. What's right for one family will not be right for another. Wishing, or demanding, that it is different will not make it so. Perhaps the greater question deals with how we respond to people who will handle this decision differently than we do.