Blah.
Flags are powerful symbols. I happen to be rather fond of this country, (while quite aware of her flaws and sins), and it would bother me to have another nation's flag on the same pole being flown above the flag of the United States of America.
Further, especially with veterans, that flag might just represent more than you can imagine. When you've dedicated enough years of your life, in the cold/hot/being shot at/away from home/being spit on by hippies this country, and its symbols might become more significant.
Besides, looking beyond the rag vs rag argument, the place of Mexican immigrants in the US is a tenuous topic these days. I was confused and less inclined to look upon the plight of illegals in the US after they marched not as Americans demanding their rights, but as Mexicans, in America, demanding rights. The flag arrangement might be seen, by some, as an extension of that identity.
So short answer: I wouldn't have torn down the flag. Then again I wouldn't have called the police on the guy that did it.