Yep, that should have been the end of the Die Hard franchise, right there. Sure, the gun was filled with blanks, but the cops around McClane didn't know that -- all they saw was some crazy guy shooting at their boss. If a single one of those cops had done their job (that is, placed a bullet on McClane's face), then who would have stopped the next four or so terrorist attacks/heists against America and Russia? Argyle the limo driver?
Did all the cops fire blanks at him, too? Plot twist!
After ejecting from an exploding plane and surviving a crash on a flying snowmobile, being gunned down by your fellow cops would be a pretty damn anticlimactic way to die -- and for what? Five seconds later, McClane finally convinces Lorenzo by pulling out the blank cartridge and showing it to him. So ... why not just do that in the first place?
Or shoot at the ceiling? Or anywhere but at the police captain?
Being a cop himself, McClane should know how quickly police officers will open fire if they even think they see someone drawing a weapon -- it's part of their training. Hell, even his best bud, Sgt. Al Powell, mistakenly shot an innocent kid because he was holding a toy gun. Then again, Lorenzo was such a douchebag that maybe his own men were happy to watch McClane mow him down.