Washington, D.C. — The Biden administration announced on Monday a new proposal to raise capital gains taxes for individuals earning over $1 million annually, a move that has sent ripples through financial markets and sparked heated debate among investors and lawmakers alike. Under the proposal, the top capital gains tax rate would increase from 20% to 39.6%, aligning it with the top ordinary income tax rate. When combined with an existing 3.8% surtax on investment income, the effective federal rate for wealthy investors could reach 43.4%, the highest in decades. Stocks responded with immediate volatility. The Nasdaq Composite fell 1.7% on Monday, with major tech and growth-oriented names such as Tesla, Amazon, and Nvidia leading the declines. The S&P 500 dropped 1.2%, while the Dow Jones Industrial Average shed 0.8%. "This proposal is clearly weighing on sentiment, particularly among growth investors who may be looking to lock in gains before any tax changes take effect," said Alicia Freeman, senior equity strategist at Morgan & Sons Capital. "It’s the uncertainty of timing and implementation that’s causing the most concern." Administration officials argue that the tax hike is essential to fund ongoing infrastructure and social spending initiatives. "We believe that those who have benefited the most from the economic recovery should contribute fairly to its sustainability," said Treasury Secretary Janet Yellen in a press briefing. Republican lawmakers and some centrist Democrats, however, have expressed concern over the potential market impact. Senator Joe Manchin (D-W.Va.) stated that while he supports tax reform, he is “not sold” on the proposed rate increase and its implications for investment. Meanwhile, financial analysts at Goldman Sachs warned clients that if the proposal gains traction in Congress, markets could see a wave of profit-taking in the coming months. "Historically, capital gains hikes have led to short-term sell-offs, particularly among top-performing equities," their report noted. The proposal is expected to face significant debate in Congress, where Democrats hold only narrow majorities. Senate Finance Committee hearings on the legislation are scheduled for next week, and investors will be closely watching for any signs of compromise or political roadblocks. With the fate of the measure still uncertain, market participants are bracing for continued volatility. "It’s not just about tax rates—it’s about the direction of fiscal policy in a high-inflation, post-COVID economy," Freeman added. "Investors will need to stay nimble." The capital gains tax proposal marks one of the most consequential fiscal developments of 2024 and could set the tone for equity markets heading into the second half of the year.