I like your argument, it's quite true that most theocracy states are opressive and sometimes became totalitarian.
But do you think, it's possible that a theocracy country is not oppressive and quite democratic?
Sure, it's possible. I understand that ancient (polytheist) Persia had a very egalitarian and religiously free situation going for it.
Heck, the only possible time I could see any kind of theocracy even remotely working would be a polytheist one. Then people could worship whatever Gods they wanted, or none at all. But if Rome taught us anything, even that could easily degenerate into totalitarianism.