Many including myself would gladly take the early withdrawl penalty before handing our accounts (either seized or highly surcharged) to the gubmit.
The communists in charge would love the scenario you described, and it is one I've predicted in the past, too.
Not only would the government get the full tax payout, they'd also get the 10% early-withdrawal penalty.
And, yes, it would wreak havoc on the stock markets — far more than they could have hoped to cause with what they've been doing for the past 6 months that has been designed to destroy faith in private investment, the stock market, and the free market itself.
You see, I believe part of the anti-Capitalist goal of the Commie-in-Chief is to destroy the entire concept of venture capital, whether of major investors or you and me “investing” through 401ks.
With no where else to turn (because the markets can't be trusted), we'll gladly “invest” our extra money in the US Government (Treasuries, Bonds, etc.) if they promise a 2% or so return.
And don’t forget, if you make an early withdrawal from your 401k or IRA, that is counted on income on your current tax year. For many people, any substantial withdrawal bumps them up into the next tax category — yet another reason why the Commie-in-Chief will likely propose an early tax on private-retirement accounts, hoping for this type of scenario.