The more people you have, the more money the settlement gets, since there are more tax-payers.

The thing is, then when a city becomes larger, that city must pay more for your army. So if you have a city with 30.000 men, you'll get a lot of money, but on the campaing map it will look like the city is actually losing money, because so much of that income goes to pay for your army. Smaller cities pay much less for the army, that's why it looks like they give you a better income.