Just wrapping up this thread in case a DIYer finds it in a search.
When I installed the flange, I put a lot of silicon caulk under it so water on the floor could not run back under the flange and under the floor.
I drilled through the porcelain tile with a diamond drill bit, not the spear bit pictured above. A diamond drill is essentially a tiny hole saw that grinds through the tile and presents less risk of cracking the tile. I used the lowest RPM possible and kept it wet; the bit never got hot, but it took about 40 minutes per hole. I fastened the toilet flange with stainless steel screws and made sure the threads did not touch the tile.
After installing the flange bolts, I caulked all the holes in the flange with silicon and caulked around the outside edge of the flange. I test-fit the toilet and marked its position with blue painters tape. I put a bead of caulk under where the front half of the toilet would sit (forward of the flange bolts).
I put a 3/4" wax ring on the flange and set the toilet on top of it, then slowly pushed the toilet down (and sat on it) to compress the ring until the toilet was solid. By my calculation, the wax ring was squished from 3/4" to 3/8". I caulked around the front half of the toilet only (if it ever leaks, I want to see the water). I let the toilet sit for three days before hooking up the water and using it, to give the caulk time to set up.
That was several weeks ago. The toilet is still rock solid, does not leak, and there is no sewer smell.
Regarding the toilet flange placement:
In this 22-year-old house, the toilet had previously been installed with the flange flush to the floor. Water had seeped out and rotted part of the subfloor. The flooring was removed, the rotten subfloor was replaced, a new vinyl floor was installed, and the toilet was reinstalled. It leaked again over time and rotted out the subfloor again. Repeat: the toilet was installed twice by professionals using a flange flush to the floor, and both times it leaked. The seepage was concealed between the subfloor and the underlayment and went unnoticed until substantial damage had been done. My neighbor had the same problem with his house of the same age.
When I redid the bathroom, I decided that I wanted to avoid another leak at all costs. I deliberately cut out the old toilet flange and replaced it and the PVC so that the new flange could sit on top of the finished floor. There is one BIG advantage to putting the flange on top of the floor. IT WON'T LEAK!!! The horn of the toilet (the toilet's own built-in flange) projects downward into the PVC flange by at least 1/4". In order for this setup to leak, the water would have to run uphill for at least 1/4" up the side of the flange, and then make it through the wax ring. And even if it did manage this feat, the water would be on top of the finished floor, where I would see it and would know to take action.
When you install the flange flush to the floor, the water runs out of the toilet and down the sides of the wax ring before entering the flange. If there is the tiniest gap anywhere between the wax ring and the flange, the water will seep into it by means of capillary action and it will end up between your subfloor and underlayment where you can't see it. It takes years for it to rot out the subfloor, and you won't know it until the damage is severe.
All authoritative web sites I found (like those quoted by nap above) recommend putting the flange on top of the floor. Here are a few more:
http://www.johnbridge.com/vbulletin/showthread.php?t=25754
http://www.johnbridge.com/vbulletin/showthread.php?t=7250
http://www.terrylove.com/forums/showthread.php?17971-Toilet-Flange-Height
http://www.terrylove.com/forums/archive/index.php/t-3630.html
http://www.terrylove.com/forums/archive/index.php/t-22332.html
http://www.askmehelpdesk.com/plumbing/proper-height-toilet-flange-348076.html
http://www.askmehelpdesk.com/plumbing/toilet-flange-height-364948.html
http://www.bobvila.com/wwwboard/messages/258382.html
http://advice.thisoldhouse.com/showthread.php?t=32
http://www.doityourself.com/stry/bathinstallatoilet
http://www.ehow.com/how_5664787_install-toilet-flange-tiled-floor.html
http://www.youtube.com/watch?v=2jl3P7sjxCk
http://wiki.answers.com/Q/What_is_t..._used_between_a_stool_and_flange_on_the_floor
http://www.plumbingstore.com/toilet-flanges.html (scroll to the bottom)
I also checked four plumbing books - all showed the flange on top of the floor in their photos. I contacted the maker of the flange, Sioux Chief, and they said it was perfectly OK to put the flange on top of the finished floor and that most modern toilets were designed for it. I checked the installation instructions for Kohler toilets (
www.us.kohler.com/onlinecatalog/pdf/1117173_2.pdf) and their diagram shows the flange on top of the finished floor.
Summary:
Authoritative web sites - on top of the finished floor
Plumbing books - on top of the finished floor
Toilet manufacturer - on top of the finished floor
Flange manufacturer - on top of the finished floor
Personal experience - flush with the floor leaks 2 out of 2 times
Logical analysis - on top of the finished floor can't leak
Risk analysis - if flange is on top of the floor, I'll see leaks right away; but if flush with the floor, not until years later
I can't say that flanges should be always be installed on top of the finished floor; maybe there are situations where the flange is best installed flush with the floor. I'm not a plumber. But I can say this: anyone who thinks that it's always wrong, shoddy workmanship, etc. to put the flange on top of the finished floor, or thinks there is no advantage to it, is mistaken and really ought to think it through again before giving advice.