First if all you are connecting incorrectly your push-button, I don't see how you gonna get a '1' with it.
This PIC has weak pull ups avaiable on most pins.
The 0x20 written to WPUC will enable the pullup on RC5, so the push button circuit is ok.
The config settings are setting the internal oscillator to 32MHz, but the _XTAL_FREQ define is specifying 8MHz, so all the compiler delay routines will take a quarter of the specified time.
Make it #define _XTAL_FREQ 32000000
The config settings have MCLR on and LVP on. The schematic does not show any pullup resistor on MCLR.
If there isn't one, then you should change both MCLRE and LVP to off.
Personally, to start with I would remove the pushbutton test, and simplify the code to simply toggle the LED every 500ms, so you should get a steady 1 second flash if it's running correctly.
Only once you succeed with that, add the pushbutton test back in.
The secret to effective debugging is to reduce how many unknown problems you are testing at each step.