I understand that many things close in Germany on Christmas and Christmas Eve. We plan to visit both Rothenburg and Munich during our trip and wondered which would better place for a magical Christmas.

What year are you talking about? 2004, perhaps?

Yes, 2004.
Does anyone know if there is a tasty restaurant in Rothenburg that serves dinner on Christmas day?

I would think that the Romantik Hotel in Rothenburg might serve Christmas lunch. They had a very extensive New Years Eve Menu. We were in Rothenburg on December 28th and 29th this year and in the evenings it was pretty quiet but absolutely enchanting and if it is a magical little town that you are looking for then Rothenburg certainly has it and the lack of people didn't bother us a bit. Probably in Munich you would find quite a few restaurants open plus of course it would still be quite lively. In Rothenburg we stayed at the Burg Hotel and couldn't have wished for a better hotel.

I was in Germany for Christmas 2003 and had no problems. On the 24th, I arrived in Hamburg in the evening and tried four hotels near the station before I found one that was open. Most restaurants were closed on the evening of the 24th, but in a big city, some places stay open (opposite the station in Hamburg, one traditional German place and one Italian pizzeria/ristorante were open; in a smaller town, you should have a big lunch and buy a snack to eat in the evening. On Christmas Day and the 26th, there were restaurants are bars open everywhere, so no problem whatsoever.