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WALLACE: And, hello again, from Fox News in Washington.
On this holiday weekend, we are watching several major foreign policy developments from Egypt, to Gaza, to the continuing controversy over the Benghazi attacks.
Here to talk about it all is Senator John McCain.
And, Senator, welcome back to "Fox News Sunday."
SEN. JOHN MCCAIN, R-ARIZ., RANKING MEMBER, ARMED SERVICES COMMITTEE: Thank you, Chris. Dancing with turkeys?
WALLACE: Well, you'll have to wait until the end of the show to see.
MCCAIN: That's what we're doing now.
WALLACE: Let's start with Egypt where President Morsi, late this last week, basically granted himself almost unchecked powers and sent thousands of protesters packed into the streets, the people who have been helping to topple Mubarak, now back in the streets, against the many they are calling the new Egyptian pharaoh.
What are the chances, Senator, that are we headed for a new Islamist coup and new Islamist state in Egypt?
MCCAIN: I think it could be headed that way. You also could be headed back into a military takeover if things went in the wrong direction. You could also see a scenario where there is continued chaos.
I'll never forget, Chris, after I was in Egypt, I met with the young people who made the revolution in the square, and, a young woman said, Senator McCain, it's not the first election we worry about, it's the second. That's what we have to worry about, a repeat of the Iranian experience in the 1970s.
So, look -- but, what should the United States of America do? They should be saying this is unacceptable. We thank Mr. Morsi for his efforts in brokering a cease-fire, which is, by the way, incredibly fragile but is not what is acceptable. This is not what the United States and American taxpayers expect and our dollars will be directly related to the progress towards democracy, which you promised the people of Egypt, when your party and you were elected president.
WALLACE: Well, I mean, let's talk about that, because, Morsi took his step hours after Secretary of State Clinton praised him for helping broker the peace deal between Hamas and Israel. And so far, at least the administration issued, the State Department, a very tepid criticism.
How tough should they get with them? Should they directly say, you got to pull back? I mean, what should our demands be and what should our leverage be?
CAIN: Our leverage, obviously, is not only the substantial billions in aid we provide, plus, debt forgiveness, plus an IMF deal, but also the marshalling world public opinion is also against this kind of move by Mr. Morsi.
We appreciate President Morsi's action. But, you know, in the past, it's always been the United States that brokered the peace deals and there is a clear perception, at least amongst Hamas, that they won on this one. And, unfortunately, the PLO has been -- Mahmoud Abbas and others have been diminished as a result of the negotiations and the settlement that was reached. And I predict Hamas will continue to test the Israelis and how far they can go.
And, finally, let's trace some of this back to Iran. Where did -- where did the missiles come from that were being fired? Iran. Where are the Iranian revolutionary guard on the ground? In Syria. The centrifuges continue to spin in Tehran.
And, so, we've got to start facing up to what is one of the prime reasons why there is the kind of unrest we are seeing throughout the Middle East.
WALLACE: Let me just button-up the Morsi thing. What should our demand be of Morsi?
MCCAIN: Stop. Stop. Renounce the statement, and the move that he just made. Allow the judiciary to function.
If the judiciary is flawed in some way, then, that's an illness that can be cured over time. But, absolutely, to assume this kind of power is unacceptable to the United States of America and, then, we can outline what actions might be taken. But, first, condemn it.
WALLACE: Let's talk a little bit, you already led us in that direction, to the cease-fire, the very fragile cease-fire worked out this week between Israel and Hamas. How fragile is it? What do you make of it?
And, you know, we saw these longer-range Iranian missiles that had been smuggled into Gaza that were being fired at Tel Aviv and fired at Jerusalem, which raises the question: if Israel takes action against Iran's nuclear program, what is the threat they face from right on their border in Gaza? And, from the Lebanese border with Hezbollah?
MCCAIN: I think they face a significant challenge with Hezbollah because of the tens of thousands of missiles that are in southern Lebanon. I also think that the Iranians will continue unless they see that there is a price to pay, which argues for the United States and Israel to establish red lines and say the Iranians, you cannot cross that.
Now, as a result of the election and what recent events, the president and the prime minister of Israel's relationship I think is dramatically improved. We certainly hope so. But it's time we work together and recognize, it isn't just nuclear weapons the Iranians are doing, I outlined the other things they are doing.
Plus, orchestrating acts of terror throughout the world, including attempts to assassinate the Saudi ambassador right here in Washington, D.C. The Iranians posed a threat to peace and stability throughout the world, and we're going to have to develop a strategy to counter that.
WALLACE: The director of national intelligence now says that he was responsible for watering down, editing, the talking points that U.N. Ambassador Susan Rice used when she went on those five Sunday talk shows -- here's the picture, the famous picture of it -- to talk about Benghazi. But you say that a few days before his office said they were responsible for editing the talking points, that in a closed-door hearing, the head of intelligence, James Clapper, told you and other senators he didn't know who was responsible.
Question -- two questions: where does the investigation stand? And how do you get to the bottom of it?
MCCAIN: Well, it is like any other -- assuming the proportions of any other major scandal in this town, there are many layers to the onion, there's all kinds of questions that have been raised. The most recent is the one you mentioned. I saw the director of national intelligence say he didn't know where these talking points were edited and now he's saying he did it. We'll be interested how that -- all that transpired. But, the biggest aspect of the whole thing is, it has to be really looked into is why there was such a failure on the part of the administration in light of events, the attack -- the two attacks on our embassy, the assassination attempt on the British ambassador. They closed their consul. All these long train of events that made our consulate in Benghazi a death trap. And then during that, why didn't we have military capabilities close by, especially on September 11th?
WALLACE: And after all of these hearings so far, and, you know, what, we're two months out -- do you have any answers to those questions as to why we weren't better prepared for this possibility?
MCCAIN: No, and I think we ought to know why as late as September 25th, two weeks later, the president of the United States, at the United Nations, was talking about hateful videos.
So, there are many things that need to be resolved. There are four committees in the House, four committees in the Senate. They are holding different hearings, all turf fights going on as it usually does in these bodies.
And we need a select committee in order to sort this whole thing out -- to find out what happened, but, also, we can't ever again have a tragedy such as took place in Benghazi and it could have been prevented in my view. Now, we've got to make sure that there are ways to make sure it doesn't happen.
WALLACE: You say that you will do everything in your power to block Susan Rice's nomination, if the president decides to name her to be secretary of state. She said this week, that all she did was rely on the intelligence community's talking points and then went on to say this about you. Take a look.
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AMBASSADOR SUSAN RICE, U.S. AMBASSADOR TO THE UNITED NATIONS: I do think that some of the statements he made about me have been unfounded. But I look forward to having the opportunity at the appropriate time to discuss all of this with him.
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WALLACE: Is there anything that ambassador rice can do to change your mind?
MCCAIN: Sure. She can -- I'd give everyone the benefit of explaining their position and the actions that they took. I'd be glad to have the opportunity to discuss these issues with her. Why did she say that -- why did she say that al Qaeda has been decimated in her statement here on this program?
Al Qaeda hasn't been decimated. They're on the rise. They are all over Iraq. Their training camps are in Libya. They are all over Syria. They are on the rise everywhere in the Middle East. So, there's a lot of questions that we have for Ambassador Rice and she would -- I'm sure that I'll have the opportunity to discuss this with her.
WALLACE: But you are saying that she could conceivably get your vote for secretary of state?
MCCAIN: I think she deserves the ability and the opportunity to explain herself and her position, just as she said. But, she's not the problem. The problem is the president of the United States, who, on -- in a debate with Mitt Romney, said that he had said it was a terrorist attack. He hadn't. In fact that night on "60 Minutes", he said they didn't know what kind of an attack it was and continued to say --
WALLACE: He didn't say that night. He said in an interview with "60 Minutes", which we didn't see until --
MCCAIN: We didn't see until after the election, I'm sure, that it was such an inconsequential statement, that it didn't deserve the attention of the American people before the election.
WALLACE: Let me pick up on in a more aspect and we'll move on.
House Democratic leader James Clyburn said this week that Lindsey Graham and you have used racial code words to go after Susan Rice. Take a look.
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REP. JAMES CLYBURN, D-S.C., ASSISTANT DEMOCRATIC LEADER: Senator McCain called her incompetent as well, but he told us that Sarah Palin was a very competent person to be the vice president of the United States. That ought to tell you a little bit about his judgment.
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WALLACE: Your reaction?
MCCAIN: You can't -- you know, dignify comments like that. I notice in this town if they can't win the argument on the merits, then, of course, they resort to those kinds of personal attacks. It goes with the territory.
WALLACE: Would you agree to raise taxes as part of a solid compromise to avoid a fiscal cliff?
MCCAIN: I would be very much opposed to raising tax rates. But I do believe we can close a lot of loop holes. The tax code is this high, we can do plenty of things to eliminate these -- in fact, two other things. One is, things like a limit on the amount of deduction of charitable giving. A limit on the amount you can take on your home loan mortgage deduction.
And, obviously, we are going to have to look at entitlement reform. Entitlement reform is the only way we are going to really get the debt and deficit under control. And we've got to take it on.
WALLACE: But let me ask you, though, you say you would consider more revenue but through loopholes and deductions, not through --
MCCAIN: Sure. And there are so many of them.
WALLACE: Let me ask you about this though. You vote against the Bush tax cuts, a decade ago, because -- and I went back and looked at it -- you said too many of the benefits go to the wealthy, not to the middle class. Now, once they were passed you changed your view and said they have taken effect. I'm not going to oppose them.
But, if you could get a solid deal, with, as you call for, spending cuts and entitlement reform and make a major -- take a chunk out of the national debt, why is the 35 percent top tax rate which you opposed sacred?
MCCAIN: Because every economist that I respect says if you raise tax rates at this time, in fact, the president even said a couple of years ago, that it harms the economy. We are trying to help the economy. And, so, unless I can be convinced that raising tax rates will be beneficial, then obviously I think there's reason and ground for my position.
But, I also believe that we can and must get an agreement, otherwise I think, first of all, the markets are going to start reacting.
WALLACE: We're going to talk about that in the next segment, and I think it is a real issue.
Finally, let's talk about the GOP. Republicans -- I don't have to tell you -- had a really rough night on election night. And let's look at the break down of some of the numbers.
You lost unmarried women by 36 points, Hispanics by 44 points. Young people by 23 points.
Does your party need to change, especially in its outreach with those groups, on social issues like same sex marriage, on immigration reform?
MCCAIN: I think we have to have a bigger tent. That's -- no doubt about it. And, obviously, we have to do immigration reform.
There is no doubt whatsoever that the demographics are not on our side. And, we are going to have to give a much more positive agenda. It can't be just being against the Democrats, and against Harry Reid and against Obama. You have to be for things, and we have to give them something like the Contract with America, that we gave them some years ago. We have to give them something to be for.
And as far as young women are concerned, absolutely -- I don't think anybody like me, I can state my position on abortion, but, to -- other than that, leave the issue alone when we are in the kind of economic situation and, frankly, national security situation we're in.
WALLACE: When you say leave the issue alone, you would allow, you'd say, freedom of choice?
MCCAIN: I would allow people to have those opinions and respect those opinions. I'm proud of my pro-life position and record. But if someone disagrees with me, I respect your views.
WALLACE: Senator McCain, I want to thank you as always for coming in today. You're going to have a busy final weeks here in 2012.
MCCAIN: We certainly are.
WALLACE: Thank you, sir.
MCCAIN: Thank you.
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