Your understanding and judgment about a couple of things is way off.
First, you really need to understand that all isolated pawns are not created equal. If it were on an open file, then you need to worry about it becoming a weakness more (frontal attack by rooks, in particular), but here, because after d5 cd; cd it is shielded by the pd6, it is hard for black to attack d5, let alone win it. Also, again, you are mistaking the famous "isolani" positions, which is an isolated d-pawn on the open file, which can often go to d5 and create k-side chances. This is not that position. This gains space, which in some types of positions can lead to an attack if the center is closed, but here, although I like d5, there are too many open lines in the middle to hope that a k-side attack will work.
I like d5 because it gains more space, and you will have the excellent d4 square for the Nf3 after you finish developing a bit more. That is a tangible and relatively permanent plus in your position.
If you do not do it now, black should play d5, and the position is closer to level. It is now, or never, and you are not losing anything on your development because black has to move the B twice also.
Positions like this typically will come down to who can seize the e-file. Even though the c-file is also open, in practice, it is not as important as the e-file. If you can double rooks, and black cannot oppose them, often due to his pieces tripping over each other in the lack of space, you will win. Also, then, and only then, you may be able to execute that k-side attack with Re3-g3 or h3.
Also, after d5 cd; cd, there is no really good square for the B to go to. c8 undevelopes it, d7 and the Q or N also want that square. f5, and Nd4 will come with tempo. g4, and white will play h3 and either gain the B pair, or at least gain luft with tempo.
Lastly, I also noticed that black's q-side will be vulnerable after the B goes to e3. For the Ra8 to move, then a6 will need to be played, and then maybe Nc4-b6 might happen. Also, if Na6-c5, black might try to secure the N with a5, and then b5 could lead to something.
All, and all, as a Master for 34 years, I really like d5.
The following is in response to the question below. It was too long to just add in as a comment.
First, let’s discuss the idea of Bc8 with b6 and Bb7. It is very bad for the following reasons: You are talking about spending three moves to reposition the B to b7, and you weaken c6, which white will get to soon. Nd4 supported by an eventual Rc1, and then the N will go to c6 severely cramping black. A white Nc6 will be absolutely intolerable, so you will be forced to spend yet another move to trade the Bb7 off for it. This will create a strong passed pawn for white on c6, and it will then expose the black pd6, which will then be on an open file, and possibly give white use of d5 for a piece, although there is no immediately good piece that could go there. Of course, white will not play Nc6 until he is sure that it will not simply be lost. In addition, all these moves are sure to put you way behind in development.
This Nd4-c6 idea protected by a pd5 is a very common idea, and compare it to Yusupov-Kuzmin 1981 (PGN below). Go through that game around the move 15.Ne5. The threat of e5 forced black to take drastic measures, but try to make other reasonable moves, and see just how much that N hinders black, and look at what happens when he takes it because he cannot tolerate it. Neither is a good option.
I do not like the B going to g4 because as white I am happy for you to trade it off on f3 giving me the two Bs. Also, if I do not lose a tempo playing h3 (“luft”, which is German for air, meaning you will not be able to backrank mate me later), which will probably be helpful later, that is another small plus. Chess is a game of accumulating small plusses at least when playing similarly-rated opponents. I am also a very positional player, and like closed and semi-closed positions, so that type of position is right up my alley. I am willing to make your position uncomfortable, and wait for you to crack.
This game comes from the 11/26/2008 version of ChessBase.
[Title "Artur Jussupow-Gennadi Kuzmi, Moscow, URS Team Tournament-ch15 Final A Tournament, 5/16/1981"]
[FEN ""]
1. d4 Nf6 2. c4 g6 3. Nc3 d5 4. cxd5 Nxd5 5. e4 Nxc3 6. bxc3 Bg7 7. Nf3 O-O 8. Be2 c5 9. O-O Nd7 10. Bg5 cxd4 11. cxd4 Nf6 12. Qd3 b6 13. Rac1 Bb7 14. d5 Qd7 15. Ne5 Qd6 16. Nc6 Qd7 17. e5 Nxd5 18. Nxe7+ Kh8 19. Bf3 Rae8 20. Rfd1 Rxe7 21. Bxe7 Qxe7 22. Bxd5 Rd8 23. Qb3 Bxd5 24. Rxd5 Rxd5 25. Qxd5 Bxe5 26. g3 Bd6 27. Qd4+ Qe5 28. Rd1 1-0
