Your second proof is right.
The axiom of choice is something that most mathematicians take to be true. Cohen showed it to be independent of the other axioms of ZF (assuming they are consistent which we haven't porved yet and don't look like disproving either).
Pretty much we want it to be true (not in the sense that we believe it *really* is true, but that we want it as an axiom) because it is the only way to find a basis of any vector space. However it does create these problems such as the Banach -Tarski paradox up there. What goes "wrong" is that by allowing us to pick bases we also then create issues where we pick other pathological sets.
Let me give at least one example: you've heard of measure theory perhaps. Here we attempt to define a consistent idea of length of subsets of, say, R, the real numbers. We let [a,b] have length b-a, and write down some other rules (a subset of one set must have smaller total length, and so on) and get a measure, what we find is we have to restrict to a certain kind of set, namely all those that can be written as repeated intersections, unions and complements of sets of the form (a,b]. The question is then are there sets that aren't measurable? It turns out that there are, but in order to write one down one needs to use the axiom of choice.
And what happens in the Banach Tarski paradox involves unmeasurable sets (I think, it's been a while).
Pretty much the problem can be summed up as assuming the axiom of choice let's us make constructions involving an infinite number of unspecified operations, which leads to some distinctly odd ideas, as well as some nice ones.
Without the axiom of choice your proof above doesn't hold as you're assuming the cardinals are well ordered, which is a consequence of the axiom of choice.
There are other things that crop up from assuming apparently reasonable axioms (such as constructibility, google for a devlin article about that one). In all honesty no serious mathematician is all that worried about it too much as long as we state that we are using it explicitly, and accept that there may be some philosophical issues there.
One may do set theory of infinite sets without it. The Bernstein-Schroeder argument is one that states that if U and V are sets with injections between each other then there is a bijection. You do this directly, no axiom of choice. The corresponding proof using surjections requires the axiom of choice.
Hope that's a start.