How much benefit the interest payments provide because of their deductibility depends on the tax rate. If tax rates are high, the ability to deduct interest payments is very valuable. If the tax rate is 40 percent, and a company has to pay $10 in interest payments, how much does it actually cost to pay $10? The company is out $10, but its pretax income is lower by $10, and that lowers their tax bill by $4, so the true cost is $6.
