I've never installed "full" Splunk installation on Windows, just UF but.
1) For internal Splunk server workings, there should be no difference.
2) If you want to do local ingestion (like reading local eventlogs) Local System will make it easier to read those
3) You might want to perform some actions or run some modular inputs that could use elevated privileges. Again - Local System would be easier to work with.
4) In general - Local System is an account with a very wide set of privileges and should not be used unless absolutely necessary.
5) If you want to perform some ingestion "across your AD" (like reading other computers' EventLogs via WMI or reading files from shares on other servers), you need AD account. Otherwise you won't be able to authenticate to remote resources.
So it's all just a matter of your actual needs and risk assessment. I'd just say that typically for such cases you should use managed service account in your AD.
