In regard to size (12" vs. 16") I thought I'd add my 2 cents... We bought our almost 3 year old a 12" bicycle for Christmas. She's not extremely tall--more in the 50th-60th percentile. I did consider how quickly she might outgrow it, however ultimately it came dow to a matter of safety. It was critical to me that she be able to stop the bike by putting her feet down, especially if it started to go towards the street or if she started to panic in regard to steering/controlling it.
I have a friend who bought her daughter (same exact age but slightly taller) a 16" for Christmas. She realized that it was too big for her daughter to control and ended up getting a 12" instead.
A 14" might provide a bit more wiggle room for growth, however 14" are not as widely available; you might have to specifically look for stores that sell 14" and/or there might not be as much of a selection.
Here's a little chart that provides approximate age in regard to bicycle frame size and the child's height/inseam. (Note: a 16" bike is thought to be the appropriate size for a child between the age of 5-8 years, depending of course on the individual child's growth/size): http://www.ibike.org/education/buying.htm
Have fun!