When Danforth demands that Proctor confess to witchcraft, John Proctor responds that “God is dead” and they will all burn in hell together. He says this because the people of Salem are the ones committing sins by continuing the hysteria of the witch trials.
At the end of Act 3, Deputy Governor Danforth asks John Proctor if he is going to confess to witchcraft, saying “I have seen your power; you will not deny it!” (Act 3, Scene 3). Proctor replies that “God is dead!” and continues while laughing insanely.
A fire, a fire is burning! I hear the boot of Lucifer, I see his filthy face! And it is my face and yours Danforth! God damns our kind especially and we will burn, we will burn together! (Act 3, Scene 3)
It is ironic that Proctor is accused of witchcraft, because he was against the witch trials from the beginning. The play "pits Salem’s authority structure, as typified by Deputy Governor Danforth with his smug self-righteousness, against its helpless individual victims" (enotes, Salem on literature, see third link). Proctor has tried to convince the others of the pointlessness and damage of the trials, and they have not listened, but he has become a victim himself.
Danforth is power-hungry and incompetent. His reaction to Proctor demonstrates how low he will stoop. Proctor realizes that he cannot get out of this situation, and Danforth will not back down. Proctor’s only choice is to give in—but go down fighting. He does this by making his harsh comments about the Devil taking all of them to Hell. The people of Salem supposedly fear the Devil, but they are acting in his stead by killing innocent people or ruining their lives.
At this point, Proctor's life has completely fallen apart. He has confessed to having an affair, but his wife has lied. He has tried to get others to tell the truth, but avoided telling the truth himself. Once he finally does, no one believes him. Proctor’s maniacal laughing is his breaking point, showing that he sees the walls closing in and is losing control.