All right, so why doesn't AT&T PAY people to get an iPhone, and then increase the cost even more?
They are "paying" you to get an iPhone. Because you are getting a subsidized price on the phone. If you wanted to buy the phone without subsidy it would be 600/700 (8gb/16gb respectively). What AT&T is doing is giving you a 400 dollar discount on the hardware in exchange for 2 years of payments (in which they earn back their 400 and then some).
This is why you can get other phones for near free or totally free when you sign up with a carrier.