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dlthomas comments on A signaling theory of class x politics interaction - Less Wrong Discussion
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I generally accept the signalling argument, but this isn't necessarily a monocausal situation. Other possibilities:
Economic -- the wealthy and the very poor aren't consuming the same goods, but the very poor and the lower middle class are. Giving more money to the very poor raises the prices of the goods that the lower middle class buys.
Psychological -- The lower middle class aspire to be wealthy. They don't want to raise taxes on the rich because they are hoping to be rich themselves in the future. The very poor probably also hope against hope to be rich later, but when immediate circumstances are desperate enough, the immediate aspiration is just to be not-extremely poor.
This depends on how much those goods benefit from economies of scale.
The relative size of the two classes seems to play into that. If you've got a vast population of subsistence farmers who're suddenly empowered to buy Levis (a privilege previously available to the much smaller population of city-dwelling workers), the resulting economies of scale will be fairly dramatic once the dust settles; but if the two groups are closer in size, increased demand will probably drown out economy of scale unless it's close to some inflection point.
The current situation in the First World is closer to the latter than the former, whereas the socialist and progressive movements of the early 20th century generally happened in an environment closer to the former than the latter. I don't have any actual data showing a causal relation here, but it seems plausible.