Don't forget digital pictures or internet content
There are a lot of arguments that are very theoretical, and of course things like bitrate and viewing distance etc., are quite valid to consider. And for sure the end results are very much in the eye of the beholder. I just want to add a few words about content that is going to be watched. Think about this before you buy, or compare...
While I agree with many people that for movies standard definition (upscaled) content is still very watchable on a smaller size LCD, and that 720p is totally fine, I do want to add that I am extremely happy with watching my digital pictures on a 40 inch, 1080p LCD. It's great coming home from a day outdoors, and watch pictures in crisp detail. It's like watching my old slides projected on a big screen. Digital pictures do get scaled down of course, but I do see a difference if I set the display to 720p vs 1080p. Displayed websites are even more obvious, and are much crisper with the 1080p setting (duh).
Choosing a display size and resolution depends on if you just want to watch movies, or if you are going to use your screen for internet browsing (where resolution becomes very important and very noticeable), or watching your digital pictures.
My idea is, think ahead about what content you will watch, or may be watching in the future. If you can afford to get the best resolution now, you will enjoy it that much longer, and will not worry if you have bought the right thing. Well... at least not for a while.