The point of the kid's interface on the Nabi isn't to "dumb it down" but rather to create a different environment from the normal stock ICS (which is also available on the Nabi) that enforces a slew of parental controls that prevent them from accessing certain content or apps installed on the device that might not be appropriate.
We have a Nabi, my daughter is 7, but we had the previous Nabi when my daughter was 6. She really loves it. Not sure how much extra cases are for the N7, but it does make that choice more expensive than the Nabi, which includes one out of the box. The other advantages of the Nabi are the (mini)HDMI out the microSD card. I've added 20GB of DVD's, music, and hundreds of home video clips and photos on that. The N7 has the advantage of having more main storage for apps (16GB vs. 8GB), GPS, and a higher res screen. Otherwise, they are both using the Nvidea Tegra 3 and super responsive and fast. Oh yeah, N7 has Jellybean and Nabi has ICS, if that's important to you.
I think they are both good choices. If I were going to be using the tablet as much as my daughter and didn't mind paying a little extra for a case, I might opt for the N7, but if it's mostly for the child, the Nabi is geared towards kids from top to bottom. It performs like any other Android tablet, but has kid-safe parental controls, and tons of educational apps and books that would take time and money to cobble together yourself...