I've been trying that, and the result seems disappointing, I got no happy difference from annexing them (bug? I think I had theocracy as well, dunno if they stack) and leaving them as puppets. It's a shame because I like the autocracy three but I really can't go into it anymore since Theocracy/Freedom is pretty much what you need to keep up with happiness in huge empires, and Order seems a better pick for later so why bother go in there. Seems kinda silly that Tradition/honor/autocracy isn't more viable for old school domination. (specialize a couple of key cities up early, go steal the rest) I still like to do it Civ4 style instead of this silly capitol stuff, I wish they would drop that, getting huge empires is a much better way to win. I really think they need to balance the happiness gains a little bit better, freedom and theocracy seems miles better than the rest.