That fact is you have to live with this neighbour and these sorts of situations (dogs, kids, etc.) can get messy and never ending.

Personally if you think you can speak with this neighbour I would ask her/him if you could sit down and talk. Don't take your kids or pets with you. Simply try first to talk to them adult to adult about the situation. Explain that if your child or pet gets hurt by their dog you will sue them, animal control will very likely seize and put down their dog and it will be awful for all parties concerned. Approach it from the view that you are trying to avert a problem before it occurs and for the welfare of both you and the neighbour. Be honest - tell them their dog scares people.

If you get no good response from this person then start carrying pepper spray and a camera. Take photos of the dog charging and barking or loose outside it's yard. Go down personally to animal control and show them your evidence and express your concerns. That way if your neighbour complains you can remind them you first tried to resolve this without involving the authorities but in the end you had to take the steps necessary to protect your young children.