Instead they showed him as normal, then suddenly revealed him to be horrible, and did a little flashback.

I mean he was kind of horrible from the very first scene, with the "miss" bullshit and his comment about girls being bad at math. He was never showed as normal.

But, then they included the racism, but only in a “dream sequence”? That both acknowledges that the racism was massive in the 1950s, but somehow simultaneously pretends that in the “real world” it didn’t exist?

Again, no. They acknowledged that the diner was segregated - it just so happened that the employee and grieving mother didn't care. There were people who weren't fans of segregation at that time.

But, he has never taunted someone who was captured before. Much more doctorish would have been to attempt to reform him.

"The Family of Blood" anyone? "The Christmas Invasion"?