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Stocks sink on news of Biden plan to hike capital gains tax

Stocks fell sharply Thursday following a report that President BidenJoe BidenFormer Rep. Rohrabacher says he took part in Jan. 6 march to Capitol but did not storm building Saudis picked up drugs in Cairo used to kill Khashoggi: report Biden looking to build momentum for Putin meeting MORE would propose increasing the capital gains tax for wealthier Americans, making them pay more tax on profits from the sale of investments.

The Dow Jones Industrial Average, S&P 500 and Nasdaq composite closed with losses of 1 percent each shortly after the report of Biden's plan to raise the tax for those making over $1 million.

Bloomberg News reported that Biden will call for increasing the capital gains tax to 39.6 percent for those earning $1 million or more, up from its current level of 20 percent. Investors would also be subject to a 3.8 percent tax on capital gains passed through the Affordable Care Act to fund ObamaCare.

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Even though Biden had campaigned on raising the capital gains tax and several other taxes on high-earners, news of an imminent proposal turned stocks south after starting the day with solid gains.

Democrats and progressives generally support raising the capital gains tax as a way to curb growing income inequality and fund programs meant to lift economic prospects for struggling Americans that have little to nothing invested in the market.

“We’re still finalizing what the pay-fors look like, but I will say that the president’s calculation is that there is a need to modernize our infrastructure, there’s a need to invest in child care, there’s a need to invest in early childhood education," White House press secretary Jen PsakiJen PsakiHarris highlights COVID-19 vaccination safety, efficacy in SC event to kick off tour Biden prepares to confront Putin Biden aims to bolster troubled Turkey ties in first Erdoğan meeting MORE told reporters at the White House during a Thursday briefing.

"His view is that that can be on the backs of the wealthiest Americans who can afford it, and corporations and businesses who can afford it," she continued, adding that Biden "stays firm to his commitment to not raise taxes on Americans not making over $400,000 a year."

Republicans and advocates for the financial services are generally opposed to raising the capital gains tax, insisting it would discourage investment in companies and curb long-term growth.

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"Another #EconomicBlunder by Biden Administration. Punishes investment in local biz, economy, technology, expansion. Result: slower growth & investment in U.S. Sabotages economic recovery. And future growth," tweeted Rep. Kevin BradyKevin Patrick BradyOn The Money: House Democrats line up .5T in spending without budget | GOP takes aim at IRS | House Democrat mulls wealth tax Republicans open new line of attack on IRS To address labor shortages, Congress should try a return-to-work bonus MORE (R-Texas), the retiring top Republican on the House Ways and Committee, which has jurisdiction over tax policy.

Stocks have set new record highs throughout Biden’s first three months in office after the president signed a $1.9 trillion stimulus bill and the pace of COVID-19 vaccinations accelerated, both of which are expected to drive a strong rebound from the pandemic-driven recession.

The capital gains tax hike is one of several increases Biden is eyeing to fund a $2.3 trillion infrastructure proposal and an eventual follow-up focused on education, child care and paid family leave. The president also proposed an array of corporate tax hikes and deduction eliminations to fund his infrastructure plan, which were swiftly rejected by Senate Republicans.

GOP senators countered Thursday with a $568 billion infrastructure plan funded with user fees that will almost certainly fall flat among Democrats.

Updated at 4:10 p.m. Brett Samuels contributed.