The following is a rush transcript of the April 18, 2010, edition of "Fox News Sunday With Chris Wallace." This copy may not be in its final form and may be updated.

CHRIS WALLACE, ANCHOR: With Washington as polarized as it's ever been, a senator who used to find areas of bipartisan agreement is now leading the charge against the Obama agenda. We're joined by Senator John McCain.

And welcome back to "Fox News Sunday."

SEN. JOHN MCCAIN, R-ARIZ.: Thank you, Chris. And again, thanks for having General Odierno on. I think he's a great leader and he and General Petraeus are as good as we've ever had.

WALLACE: Well, looking forward to talking to him.

I want to start with a report in the New York Times today that Defense Secretary Gates sent a top secret memo to the White House in January warning that the U.S. does not have an effective strategy to deal with Iran as it makes steady progress towards a nuclear weapon. Your reaction?

MCCAIN: I didn't need a secret memo from Mr. Gates to ascertain that. We do not have a coherent policy. I think that's pretty obvious. We keep threatening sanctions. We keep, for well over a year now — in fact, including the previous administration — we keep threatening.

And obviously, we have not done anything that would in any way be viewed effective. Former secretary of state George Shultz once told me — he said, "My old Marine drill instructor said never point a gun at somebody unless you're willing to pull the trigger."

We have to be willing to pull the trigger on significant sanctions. And then we have to make plans for whatever contingencies follow if those sanctions are not effective.

WALLACE: Let — well, let — let me...

MCCAIN: And it's pretty — could I just say...

WALLACE: Yes.

MCCAIN: ... I believe that the Chinese and the Russians will not be particularly helpful.

So why don't we get our European allies together and let's impose sanctions from that aspect of it? Maybe that would embarrass somehow or force the Russians and Chinese to act in a more cooperative fashion.

WALLACE: So forget the U.N., just impose...

MCCAIN: Maybe not forget the U.N., but certainly go ahead and move forward with some serious, meaningful sanctions.

WALLACE: What are sanctions?

MCCAIN: Well, refined petroleum products is one. The other, I think, is stand up for the human rights of the people of Iran. Put the pictures of those people who were brutalizing and killing and torturing the demonstrators and the people who are standing up for their God-given rights. Make them famous. We did that in certain respects during the Cold War.

WALLACE: And what about military action?

MCCAIN: Well, I think, obviously, every contingency has to be on the table. I think that we — it's pretty clear that the Israelis cannot live with a nuclear-armed Iran. We saw news reports that the Syrians have moved Scud missiles into southern Lebanon. That is a serious escalatory move. Now Jerusalem and Tel Aviv are within range of Scud missiles.

So I think that we have to have contingency plans. But I do agree with most experts. Let's try to get the pressure on from all directions, tough, tough sanctions, and stand up for the people that want and obviously are demonstrating in the streets and are being brutalized in the prisons.

WALLACE: President Obama spoke at a fundraiser on tax day in which he noted that the — that the White House over the past year has imposed or passed 25 tax cuts that he says benefit the American people. And then he said this.

(BEGIN VIDEO CLIP)

PRESIDENT BARACK OBAMA: I've been a little amused over the last couple of days where people have been having these rallies about taxes, taxes. You would think they would be saying thank you.

(END VIDEO CLIP)

WALLACE: The president says Tea Partiers should say thank you.

MCCAIN: Well, that's probably one of the more motivating statements for the Tea Partiers. The fact is that taxes have gone up. They're going to go up. And they are going to violate the president's pledge as far as single people making $250,000 and $200,000. Taxes are going up. We all know that.

The health care bill has a broad variety of taxes that are going to be imposed, including there will be increases in capital gains tax, which obviously flies in the face of historical precedent. When we increase capital gains taxes, dividends go down.

This is a big government expansion, and you cannot expand government without increasing spending and, over time, increasing taxes.

WALLACE: Well, what do you think just of the president's demeanor there, when he says, "Well, these Tea Party rallies — they amuse me?"

MCCAIN: Well, I think he's not amused. That's why he's reacting the way he is. He reacts to this network with a certain frequency, and you and others directly.

I think the president has forgotten one of the examples of how to handle this kind of thing, and that was Ronald Reagan. And Ronald Reagan used to hear about — remind him of his critics, and he would just kind of smile and pass it off and press on.

But I'm sure the Tea Parties are encouraged to get into a direct confrontation with the president of the United States.

WALLACE: You introduced on tax day a measure that passed the Senate by 85-13 opposing a value-added tax. Now, while some of the president's advisers have said maybe we have to consider it, the president has not proposed it. Why offer the amendment?

MCCAIN: Well, because there is all kinds of talk around Capitol Hill with the Democrats and others about the answer is a value-added tax, which we know is regressive. Two, the European example is not one that we want to follow. And three, would be in addition, clearly, to the present tax.

And it is — in a way it's a hidden tax, because only the end consumer really understands the cost of it when they pay the ultimate price. I think a value-added tax would be a very, very serious mistake. It's another backdoor way of increasing revenue.

WALLACE: How seriously do you think the White House and Democrats are considering a value-added tax after the 2010 election?

MCCAIN: I don't know, because they don't take me into their confidence. But I keep hearing from all over this town that a value- added tax is the way that they want to go.

WALLACE: So this was a preemptive strike?

MCCAIN: Yes, sir. I think we ought to be on record.

WALLACE: And do you think a vote of 85-13 means anything? I mean, do you think that...

MCCAIN: I think it's...

WALLACE: ... ends the debate?

MCCAIN: It probably doesn't end the debate, but I think it sends a signal. And I thought it was an important one at this time as it was coming up into the national dialogue.

WALLACE: Senate Democrats may bring financial regulation of Wall Street to the Senate floor this week; if not, certainly in the next couple of weeks. And the White House has now told Senate Democrats to drop the idea for — of a $50 billion fund paid for by the actual financial industry to liquidate — I mean, to finance the liquidation of these big institutions. Is there a deal to be made on financial regulation?

MCCAIN: I believe there is. I believe there could be. But it's also well known the White House sent out the word, stop negotiations. But I think conversations are still going on.

There's a number of aspects of this proposal that are disturbing to me. And by the way, I believe the White House is right. Do we need to spend more billions of dollars to bail out institutions? I thought the object was to make institutions too big to fail — do away with them being too big to fail so therefore the taxpayers' dollars wouldn't have to be used. So I agree with the White House. Hurray!

The — but on this — on this business of leaving Fannie...

WALLACE: So what's the hold-up here?

MCCAIN: Well, leaving Fannie Mae and Freddie Mac out of it. Fannie and Freddie were the — two of the major catalysts in this whole meltdown, this indiscriminate lending of money to buy homes for people who could never pay it back, the pressures of the committee — Community Reinvestment Act to lend these loans to people that were never going to be able to make their mortgage payments.

So Fannie and Freddie being left completely out of it, and the fact is we have to look at a number of other aspects of this which increase the role of unelected, unaccountable officials and, I think, a greater role of the Congress of the United States.

WALLACE: So you're upset about the fact that the — that the Fed would have a bigger role in overseeing all of this?

MCCAIN: It concerns me because the Fed didn't play a very good role the last time around. And I think there needs to be a lot more government involvement, congressional involvement and oversight.

WALLACE: But...

MCCAIN: And when we find out that Goldman Sachs was betting against its own investors and, you know, playing the double game — and I'm sure we're going to find out they weren't the only ones — look, things have got to change in the way that they do business. And one of them, I think, is - - really, is to let bankers do the traditional banking of lending money and having them be backed by the federal government and the FDIC.

People want to engage in all this other stuff we've been reading about, just don't have the taxpayers involved. Let them take their own risk.

WALLACE: But you know, you brought up Goldman Sachs and the allegations are that they were putting out investments that they knew were going to fail and that, in a sense, they were profiting from their failure, but selling them to some of their customers.

If they bring — if the Democrats bring this bill to the floor, now especially that it has the $50 billion fund out of it, it will be in a position of them saying they're pushing for regulation on Wall Street, and Republicans are filibustering it.

Don't they look like they're trying to crack down on the fat cats and you guys are protecting them?

MCCAIN: Well, I think that's obviously their goal. The president and the administration people have articulated that. I think we have to make an argument that we can't see a regulatory scheme which would then allow a repetition of this meltdown that we've seen, that we saw a year-and-a-half ago.

So our effort has got to be to say, "Look, we'll sit down, but we want to see a scheme that ensures the fundamental principle that never again is any institution too big to fail." And this — and I don't think that this present legislation before us can guarantee that.

WALLACE: What a lot of people see in John McCain these days is a move to the right, a more aggressive posture towards President Obama, that they attribute to the fact that you face a tough challenge from former Congressman J.D. Hayworth in the GOP primary. Of course, you're running for reelection in Arizona.

And they point to a comment that you made to Newsweek recently. And let's put it up on the screen. "I never considered myself a maverick. I consider myself someone who serves the people of Arizona to the best of his ability." Senator, I don't have to tell you we found dozens of examples from the 2008 campaign in which you talked about being a maverick.

Let's put them up:

(BEGIN VIDEO CLIP)

NARRATOR: He's the original maverick. One is ready to lead, McCain.

(END VIDEO CLIP)

(BEGIN VIDEO CLIP)

MCCAIN: If you want real reform and if you want change, send a team of mavericks. And what maverick really means, what this team of maverick really means, is we understand who we work for.

(END VIDEO CLIP)

WALLACE: How can you say I never considered myself a maverick?

MCCAIN: Well, look, when I was fighting against my own president, whether we needed more troops in Iraq, or whether we — spending was completely out of control, then I was a maverick.

Now that I'm fighting against this spending administration and this out-of-control and reckless health care plan, then I'm a partisan.

I've been called a lot of things, and I'll be glad to be called anything. But I'm a fighter, and that's what I am. And I fought against my own administration when I wanted to, when I thought it was necessary to do so, and I will fight against this administration when I think it's necessary to do so.

WALLACE: But if I may press you...

MCCAIN: Yeah, sure.

WALLACE: ... it isn't what other people are saying about you, it's what you're saying about yourself.

MCCAIN: Sure. Yeah.

WALLACE: You said, "I never considered myself a maverick."

MCCAIN: Well, all I — what I was saying was that I have considered myself a person who's a fighter. I wouldn't be around today if I wasn't a fighter. I fight for the things that I believe in, and sometimes that's called a maverick. Sometimes that's called a partisan. And people can draw their own conclusions. I prefer "great American" myself, but...

WALLACE: So are you running away from the maverick title...

MCCAIN: No, of course not.

WALLACE: ... because somehow it indicates that maybe you're not a true blue conservative?

MCCAIN: No, my title is that I fight for the things I believe in. I fight for people of Arizona who are hurting very badly right now. Half the homes in Arizona are under water. We have real unemployment of some 17 percent. And I'm continuing to fight for them as I have ever since I was fortunate enough to serve the people of Arizona.

WALLACE: Your race against former Congressman J.D. Hayworth is tightening. Let's take a look at the latest polls. Last January, you led by 22 points. In a poll this week, you led by five. And Hayworth described your conservatism this year this way, "To the extent that he can encourage amnesia in the electorate, that's what he's aiming to do."

MCCAIN: Well, I enjoy the race. I love a campaign. I enjoy traveling all over the state. I'm confident of victory. And if we want to talk about who's conservative and who isn't, we'll have that conversation during this debate.

I fought against earmark and pork barrel spending. Mr. Hayworth still defends earmark and pork barrel spending. That's one of the litmus tests about who's really conservative as to who's — really takes care of the taxpayers' dollars.

But look, I enjoy the fight. It's a good scrap. I will always believe that a fight not joined is a fight not enjoyed. And I'm enjoying every minute of it. I'm confident we'll do fine.

WALLACE: And what do you make of his comment that there's been sort of an election year conversion to a more down-the-line conservatism on your part?

MCCAIN: Well, just — the record indicates, as I said, I've been against wasteful and earmark spending when it wasn't popular. I fought for the surge against my own president and secretary of defense. I have fought for the things — against this Obama-care. I have fought against the wasteful spending now today.

My record's very consistent and I'm very proud of it.

WALLACE: Finally...

MCCAIN: But the people of Arizona really want us to know — want to know what we're going to do for them. And I think I can make a case that I am much more effective here in helping them out of the most difficult times they've ever faced.

WALLACE: Finally, and we have less than a minute left, there's a lot of anger out there against Washington...

MCCAIN: Yes.

WALLACE: ... against incumbents. You've been in this town a long time.

MCCAIN: Yes.

WALLACE: You've been an incumbent a long time. MCCAIN: Yep.

WALLACE: Do you worry that in that kind of anti-incumbent anger you could get swept out?

MCCAIN: No, I don't worry about it. I know that I can out- campaign anybody and I — the people of Arizona know me very well.

But you're right, there is anger and frustration out there at a level that I have never seen before. And for those of us who work here who disregard that, they're making a serious mistake.

WALLACE: Senator McCain, we want to thank you so much for coming in today. It's always a pleasure to talk to you, sir.

MCCAIN: Thanks for having me on.

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