Of course, there are limits to freedom in most types of governmental systems. However, a theocracy presupposes that one version of God and or one religion is the right one. That leaves the door wide open to persecution of those who do not hold this or who change their minds as they learn new ways of thinking.
Because we do not live in a Theocracy, we tend to be scared that it would be a bad government system. We also tend to forget that other cultures have different values. What we consider sacred, and so formed our government around, is not what necessarily what other people groups would choose.