Yip a difficult choice, as Kruger will be crowded. However, if you head off the main roads, even in peak season you can find solitude!
Personally, with two youngsters looking for animals I would choose Kruger in December. Once the rains start in Etosha it can be very hit and miss. In both parks you can drive quite a long time without seeing any real game, but the likelihood is in Kruger that in December you will see more game, and there are more facilities around the park to stop at and give the younger ones a break.
The only thing I would say, is just also consider the malaria perspective. This year has seen quite high incidence of malaria in the Kruger area, and we would generally recommend you take malaria precautions in Kruger in the summer months. With Etosha it is a lot less clear cut. In the dry season there is little to no chance of malaria in Etosha, and even in the wetter months the chances are still slim - although we would always advise getting the advice of a doctor.
While it is possible to do Kruger, Cape Town and Sossusvlei in two weeks, I fear you would spend too much of your time getting from one place to the next that you would lose a large part of your vacation.
You don't mention when in December you will be travelling as there will be a huge difference if you travel between 1 - 15 December or 16 - 31 December. The latter period will be extremely busy in both Kruger and Cape Town. Remember if you do opt for Kruger that they will have restrictions on the number of people entering the park each day, planning will be necessary.