Once all the work is done post a picture here in the comments for better help. I'm not a fan of bare windows. I think you may want something on them because your neighbors seem close

I always prefer as much natural light as possible. You have perfect windows for cafe curtains.

I personally don't like the looks of bare windows, they just look unfinished. If the casement window lets in too much light and you don't need the privacy I'd suggest doing a solar roller shade. The solar shades allow you to see out, but they cut down on the heat and the glare. I'd then do a fabric cornice over the roller shade and on the bay window. Doing the same valance will tie the windows together.

I never would have guessed that the blinds store guy doesn't like bare windows! :D

You can put blinds/other window treatment on one window and not the other. As for what? Depends! Take down the paper and do whatever painting you need and you'll probably get more specific answers.

(Unless it's in bad shape, I think I would keep the chair rail. It looks nice with the windows and it's certainly appropriate for a dining room and kitchen.)

I like how natural blinds add some interest and texture. I'd have to see the entire room to give advice about your chair rail. I suspect your dark trim already adds a lot of visual lines to the room, removing the chair rail will probably make the space look less busy.