Over the last 5 years my salary has doubled, so I suppose I can look at this thought experiment pretty objectively. The short answer is that you're right but so are they. I am happier, but not as happy as I thought I'd be because my expenses have also increased. Also, beyond increased expenses the horizon of what is possible has also improved and those things are more expensive.

So yes, there's all of that. But as i started with I am happier due to having more money. There are all sorts of things I'm able to just do without thinking about it now, things where I'd previously need to consider "if I do X I wont be able to do Y next week". I don't have to trade a retirement savings for a comfortable lifestyle. I'm able to afford more and better leisure activities. And then, to tie it back to your side, I go visit my friends who make twice as much as I do and I realize how much better off I could be.

If I can presume to summarize your thoughts which coincidentally line up with mine: "Happiness increases with income, but not linearly."

Yep, that's a better tl;dr than the one I tried to give before I rambled off.

That and confirming the aspect the person I was replying to had mentioned where as income increases one tends to change the goalposts.