I think it's pretty obvious that people aren't offended by the American flag, and that is not the problem here. The problem was the intention. People are just up in arms about it because it happened to involve the American flag.
The intent being.... what? Cinco de Mayo is mostly an American holiday anyway, it is seldom celebrated in Mexico, outside of Puebla. More white Americans celebrate it than Latino Mexicans. :shrug:
Was it in poor taste? Maybe.
Was it offensive? Not to anyone with any brains.
These Latino kids, their families immigrated to the US to start a better life, just like my family did from Switzerland. If the administration had been smart, they would have turned this into a lesson on the multi-ethnic diversity of the nation. Mexican and American flags displayed side by side, reflecting the ethnic mix of the school.
Instead, they sent kids home for wearing an image of a flag that probably is probably displayed in every classroom in that school. It was silly, and the wrong thing to do.
Once again, I can't stress how much Cinco de Mayo is NOT a big holiday in the majority of Mexico.