This is a rush transcript from "Hannity," July 27, 2010. This copy may not be in its final form and may be updated.

SEAN HANNITY, HOST: In addition to counting down the days to the 2010 midterms, we are keeping an eye on another clock here at "Hannity," because in 157 days, if Congress does not act, the largest tax hike in American history will take effect.

On January 1, 2011, the Bush-era tax cuts will expire, and families and small business all around the country will suffer. But a group of concerned citizens known as the League of American Voters is calling on Congress to extend the cuts. And let's take a look at their latest television ad.


FRED THOMPSON, FORMER PRESIDENTIAL CANDIDATE: My friends, our nation faces a massive automatic tax increase at the end of this year when the Bush tax cuts expire. When that happens, your income taxes could increase by 10 percent or more. Capital gains taxes will jump over 30 percent. Taxes on dividends will more than double. It could be devastating for the economy.

Help stop this automatic tax hike. Go to RenewTheTaxCuts.com and sign the League of American Voters petition.

I'm Fred Thompson for the League of American Voters.


HANNITY: And joining me now from Washington is the man that you saw in that advertisement, former Tennessee senator, presidential candidate, host of "The Jeri and Fred Show." Fred Thompson is back with us.

Fred, welcome back.

THOMPSON: Thank you. Thank you, I appreciate it. Did that ad persuade you?

HANNITY: It persuaded me. In all seriousness, the ad is very effective.

It's interesting. Did you hear what Nancy Pelosi said about this? She goes, "No. If a tax cut expires, that's not a tax increase." Well, tell that to the families of four that make 40 grand a year that will lose $2,500 or have to pay $2,500 more a year.

THOMPSON: Yes. Or lose their tax - child tax credit or suffer the marriage penalty again that we've gotten rid or, you know, a few other things like that. No, it's absurd.

HANNITY: All right. Why don't we go through everything that you say in this ad here? All right. As of January 1, 2011, 157 days from now, what happens and who does it impact?

THOMPSON: Well, it impacts everybody. Absolutely everybody. Even if the Democrats have their way, and the administration has its way, and they kind of choose winners and losers in this thing and only tax a small percentage of people, it's going to be a loss for everybody. It's going to be a major income tax hike.

You're talking about the top rate going to 39.6 percent. It's really - by 2013, with additional taxes and Obamacare and phasing out of deductions and so forth, the top income, it will be more like 44.6 percent for that rate. But all the rates go up.

Capital gains rates are going up by a third. Dividend rates for, you know, people who have a little stock, we want the stock market to go up, so we tax those folks who are investing in the stock market. We want investment, but we tax the folks who are making a little money on investment and capital gains. All those things.

Plus, as I said, the child tax credit and the marriage penalty and on and on down the line. And another deduction is phased out as we go.

HANNITY: You add the 44 percent that will become - for example, if you live in New York, that's 54 percent.

THOMPSON: Oh, yes.

HANNITY: If you live in New York City, you've got a city tax. Then you've got a huge sales tax. Then you've got property taxes. You're well over 60 percent of your income.

And then liberals still tell you that you're not paying your fair share and that, you know, the rich need to pay more. Explain why that is a fallacy. Why that - why that would impact lower and middle income Americans?

THOMPSON: Well, in the - in the first place, you know, every politician that ever run for office ought to be asked a simple question: how long - a person who worked for the government, should we work two days for the government or three days for the government? What answer should that be. A lot of people would be surprised at how long we work for the government.

This administration is - is trying its best to kick the economy while it's down. It is trying to sell the American people on the notion that, if they'll just limit the tax increases to - to the upper income group, that it won't affect them.

But you're talking about primarily small businesses here. You're talking about the engine of growth in this country. The folks who hire most of the people in this country, 20 million people, these small business people hire. You're talking about people who worked hard all their lives in many instances, just got to that upper - upper bracket.

We're a fluid society. We don't - we're not born in one tax bracket and stay there all our life. We've been in every tax bracket as we - as we go along. And the producers and the engines of growth and the people that hire folks.

And we've got 1.8 trillion dollars sitting on the sidelines, they say, in this - in this economy, in this country now by business because they're afraid. They're afraid of what's going to kick in next year in terms of taxes and regulation and all that. And as you like to say, you know, I've never been hired by a poor person.

HANNITY: I say it a lot; never have been. And those were my years in the restaurant business and construction or any of the years that I've been in media.

I put the question a little bit differently. The way I ask it is, you know, at what point do we cap the percentage of your income, what you make that has to go over to the federal government?

Let me ask you this, because it seems Democrats, some of them - Kent Conrad, Evan Bayh, Ben Nelson and others - are trying to posture a position that they're actually against eliminating the cuts or letting them expire.

But on the other hand that's - are you encouraged by that, or as you as cynical as I am that they're just playing a political game, that they want to play both sides for the middle and - and they want them to expire and then they can claim that they opposed it?

THOMPSON: I don't know. I can't read their mind.

I was impressed, though, when Kent Conrad came out. You know, he's the chairman of Senate Budget Committee, a Democrat. And he said, "You know, it's not a good idea to increase taxes in a down economy." Well, as the kids would say, duh! You know, that's almost a unanimous consensus. Anybody who's ever taken a look at it.

Kent Conrad is not the only one who feels that way. The father of Keynesian economics, John Maynard Keynes, felt the same way. And I think Democrats are hearing the music a little.

People are not as susceptible to - to having their envy played upon as this administration thinks. They think that if they can - can do something, even if it hurts the economy, that's going to take something away from a group that they're not a part of, the two or three percent, the way they like to put it, that that will go over well politically and they can win that, you know. Rich versus poor.

We just got through a segment of black versus white, another one in this country. But this president is bringing us all together now. He's going to base this tax argument on rich versus poor. Going to give everybody - everybody in America a tax cut, in effect, or let the tax cuts remain for them, except just two or three percent of the people. That happened to be a third of our consumers and produce most of our jobs.

HANNITY: All right. Are you considering - will you consider another run in 2012?

THOMPSON: Yes, let me consider it.

Yes, I've decided not to run.

HANNITY: All right. Quick answer. Senator, good to see you. Thanks for being with us.

THOMPSON: Thank you, Sean.

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