Generally speaking, I think theocracy is a bad idea.
My primary reason is that governing tends to corrupt the religion. It is best to keep authority-temporal and authority-spiritual as seperate entities.
Fiddling While Rome Burns
Carthago Delenda Est
"I used to roll the dice; see the fear in my enemies' eyes... listen as the crowd would sing, 'now the old king is dead, Long Live the King.'.."
Freedom and Liberty are only useful within reasonable limitations, Thunder. Just as the Rights of Free Speech and the Bearing of Arms have their limitations, so do Freedom and Liberty need to have theirs. Otherwise you end up with the social anarchy we see in America today.
As for being forgiving.... I'd probably be more forgiving than you might believe. As I said, there is always a place in society for a second, lower tier of individuals who are not required to meet the criteria for citizenship and who foresake all Rights and Privileges as well. It would also be perfectly fine for people to simply LEAVE if they didn't like the way things were being run. It's only when they refuse to leave or to accept their proper place in society (or to attempt to hide their immoral acts) that true Punishment would be necessary.