If your neighbor's dog is being allowed to run loose in the neighborhood, and is not being kept on a leash, and it is scaring your son, you certainly should inform your neighbor of this, and ask him to keep the dog leashed.
If you approach him politely with this request, and he still refuses to keep the dog leashed, then I certainly would call Animal Control and file a complaint!
Your son has a right to be able to play in his own yard without being harrassed or frightened by a dog who is running loose, even if the dog is just playing, and is not being aggressive.
And if the dog does become aggressive, and your son should get bitten, it could cause him to have a permanent fear of all dogs.
As a child, your son has a right to play and feel safe in his own yard, however, legally, your neighbor does NOT have a right to allow his dog to run loose if he is being a public nuisance, and is scaring your son, even if he is harmless. Also, if the dog should get over excited by children running around, and he should suddenly become aggressive, and one of the children should get bitten, then it will be too late, once the damage is done.
My advice would be to address this issue directly with your neighbor, in a nice way, and, if he still refuses to keep the dog leashed, or confine him to his own yard, then I would definitely file a complaint with your town's Animal Control Officer, who can force him to be responsible for his dogs actions, and keep him from becoming a public nuisance in your neighborhood.