Interest payments reduce profits on both a tax and accounting basis, so the profits are lower with increased debt. Otherwise, for example, Twitter/X would have been massively profitable after Musk acquired it with debt financing. (The interest on that debt is over $1 billion/year, and is a large part of why Twitter/X is struggling.)
When finance bros talk about "interest shields" they forget to include the interest payment in calculating the total cost of the shield. For example, if two companies are identical except that one has equity financing and the other has debt financing, the one with debt financing will always end up in a worse position after accounting for taxes and debt service even though they will pay less in taxes. For companies that wish to remain a going concern, cash flow is more important than effective tax rates. It's possible to survive for decades with a high effective tax rate, but negative cash flow can kill a company in months.
That being said, I agree that allowing for corporate acquisition-debt to be deductible is the factor that artificially props up the entire private equity scam, since they use it to shield debt-funded "distributions" from the their victims and they generally load up their victims with more debt than is actually serviceable (see for example, Toys R' Us).
When finance bros talk about "interest shields" they forget to include the interest payment in calculating the total cost of the shield. For example, if two companies are identical except that one has equity financing and the other has debt financing, the one with debt financing will always end up in a worse position after accounting for taxes and debt service even though they will pay less in taxes. For companies that wish to remain a going concern, cash flow is more important than effective tax rates. It's possible to survive for decades with a high effective tax rate, but negative cash flow can kill a company in months.
That being said, I agree that allowing for corporate acquisition-debt to be deductible is the factor that artificially props up the entire private equity scam, since they use it to shield debt-funded "distributions" from the their victims and they generally load up their victims with more debt than is actually serviceable (see for example, Toys R' Us).