It's well known that economic uncertainty slows growth, decreases investment, and destroys jobs. But a new study identifies an additional cost of uncertainty: businesses are diverting money away from expanding and hiring to lobbying Washington for preferential tax treatment. And with good reason. As tax increases loom over the fiscal cliff and beyond, many businesses may get more bang-for-the-buck hiring well-connected lobbyists than innovative engineers.

In a recent study for the Mercatus Center, a colleague and I found that the complex and increasingly temporary nature of the federal tax code invites special interest groups to lobby for favor. To remain financially competitive, businesses must work constantly to secure the same (or better) tax benefits as their competitors. As the tax code is constantly changing, this cycle of chasing better tax treatment never ends as the have-nots pursue the benefits of indulged special interests. Otherwise, losing the Washington tax-benefit game may mean losing your business: the industry battle to attract investors increasingly depends on ensuring these special tax rates.

The focus on satisfying consumers with new products and services, the crux of entrepreneurship, has consequently taken second place to preserving political privileges in the tax code. In the race to keep up with industry Joneses, American businesses are spending an ever-increasing amount of resources on lobbying and acquiring political information. Consequently, this type of unproductive entrepreneurship is drowning out productive business activities, such as research and hiring. This political activism is reshaping the character of what it means to be an entrepreneur.

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