Palaces are obviously better then Towns when there are any enemy tiles - especially Fields - to be converted. Otherwise, I don't think that the Citadel's function of the Palace is usually worth the extra $1 (more than the Town) in cost.
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I'd still rather build a palace, since the building itself can't be stolen, and it could guard future mines embassies, TOWNS or what ever.
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There is rarely anything worth guarding that way. With the $1, I can place a separate Citadel which guards one more space (the very space the Citadel itself is sitting on) from Ziggurat / Palace conversion. It is also rare that I place an Embassy on my own Field which so urgently needs to be guarded (I have 6 turns, if I need to do it at all). And if I place a Palace to guard a
future Town, I'm placing my buildings in the wrong order. Basically , in the early game, when I'm spreading out, I want to save every dollar to spend on Towns, Ziggurats and Palaces (when there is something to convert); there is no money to waste (since those things are expensive).
Also in some cases, under the Embassy's peace effect, you want to place a Town in a space where placing a Palace isn't allowed.