By Jarrett Renshaw and Trevor Hunnicutt

WASHINGTON (Reuters) – U.S. President Joe Biden next week will propose raising taxes on the wealthy to fund about $1 trillion in investments in child care, universal pre-kindergarten education and paid leave for workers, sources familiar with the plan said.

Biden’s proposal calls for increasing the marginal income tax rate to 39.6% from 37%, and nearly doubling taxes on capital gains to 39.6% for people earning more than $1 million, according to the sources.

White House Press Secretary Jen Psaki said the president would discuss his “American Families Plan” during an address to Congress next week, but declined to comment on any details. Sources said details would be released next week before the address.

She said the administration had not yet finalized funding plans and underscored the president’s determination to increase investment in child care, early childhood education and making U.S. workers more competitive.

“His view is that that should be on the backs — that can be on the backs of the wealthiest Americans who can afford it and corporations and businesses who can afford it,” Psaki said.

Asked if the proposals would discourage investment in the United States, Psaki said Biden and his economic team did not believe the measures would have a negative impact.

But she noted that Congress, which is deeply divided, must approve the tax measures included in the plan, and other options could still be proposed.

The proposal, which has been in preparation for weeks, triggered sharp declines on Wall Street, with the benchmark S&P 500 index down 1% in early afternoon, its steepest drop in more than a month, after Bloomberg published a report.

Yields on Treasuries, which move in the opposite direction to their price, fell to the day’s low.

Biden’s new plan, likely to cost about $1 trillion, comes after a $2.3 trillion jobs and infrastructure proposal that has already run into stiff opposition from Republicans. They generally support funding infrastructure projects but oppose Biden’s inclusion of priorities like expanding elder care and asking corporate America to pay the tab.

Tax hikes on the wealthy could harden Republicans’ resistance against Biden’s latest “human” infrastructure plan, forcing Democrats to consider pushing it – or least some of the measures – through Congress using a party-line budget vote known as reconciliation.

U.S. Senator Joe Manchin, a Democrat from West Virginia who wields outsize power due to the party’s slim majority, has recently said he is wary of expanding the use of reconciliation.

Wealthy Americans could face an overall capital gains tax rate of 43.4% including the 3.8% net investment tax on individuals with income of $200,000 or more ($250,000 married filing jointly). The latter helps fund the Affordable Care Act.

Currently, those earning more than $200,000 pay an overall rate of about 23.8% including the Obamacare net investment tax instituted as part of the Affordable Care Act. Still, market observers said there was no small amount of doubt whether the capital gains tax proposal would make it through Congress. “If it had a chance of passing, we’d be down 2,000 points,” said Thomas Hayes, chairman and managing member at hedge fund Great Hill Capital LLC, referring to stock market indexes.

(Reporting by Jarrett Renshaw, Trevor Hunnicutt; additional reporting by Andrea Shalal, David Lawder, Dan Burns and Herbert Lash; Editing by Chizu Nomiyama and Cynthia Osterman)