But if they do that why would people buy the 32g or higher
It depends on the tier that you fall under. For the younger folks, there'll be a ton of music, photos/selfies, videos, etc that they'll have on their device since everything is too valuable to delete or export and delete from their device. Movies will also take up the majority of the storage.
For the middle aged folks, there is an emphasis on pictures and videos with the family and all, music is a plus, but there will most likely (in most cases) going to be a navigation app on the device if they travel a lot, or if the device is used as both a personal and work phone, the additional space is great for storing documents as well.
For the older folks, videos and pictures will take up the vast majority of the storage on the device from say grandkids' birthdays and such. Books as well as documentaries, movies, apps, etc that may take up space.
If the 32/64/128 capacities were not as expensive as they are now, there's an incentive to utilize more of the available storage capacity as opposed to being limited to a 16GB device, and at the same time, that would boost transactions with the AppStore and iTunes for music/movies/TV shows, books, and particularly apps that demand a large portion of storage. Because iTunes movies and shows are not exactly compressed in size, a season of a show of about 13-15 episodes will take up about 4-5GB on average. If you have 500+ songs that are 192/320KBPS, that's at least 3GB. Clips of about 5 minutes or so taken using the device itself will take up about 120MB each, the majority of apps when uncompressed with app data will take up an average of 100MB each excluding games which can break the 500MB if not 1GB mark. The little bits add up together towards the 32GB mark.
Of course I'm not saying that
everyone should get a 32GB+ device over the 16GB device, I'm just saying that if they decreased the price per tier upgrade, it would give an incentive for consumers to purchase more in the commerce POV of Apple. Some users may see the need for a higher capacity device, some not so much.