In the 1980s, Comrade Deng Xiaoping put forward the development strategy of “Two Steps”. After more than 40 years of reform and opening up, China’s economic and social development has reached a high level, and it is about to enter the ranks of high-income countries. China has basically completed the strategic goal of the first step — “letting some people get rich first”. Recently, the CPC Central Committee has started the strategic deployment of the second step — “realizing common prosperity”. The so-called common prosperity means both prosperity and sharing. At the present stage, with the increasing affluence of the whole society, the income gap among residents is still high, which indicates that China has not yet achieved “the fruits of development shared by all members of society”, so it cannot be called common prosperity. Therefore, how to effectively improve the income gap has a bearing on the grand goal of “achieving common prosperity in an all-round way” and determines the realization of the second centenary goal — “building a socialist modern power”. The formation and improvement of income gap is affected by the institutional environment. As the largest transition economy in the world, the formulation and implementation of formal system is not perfect, and the informal system may play a more important role. Culture is at the core of informal institutional arrangements. As the main body and essence of traditional culture, Confucian culture contains rich economic and ethical thoughts, which imperceptibly affects people’s thinking mode and practical activities, and will have an impact on national behavior decisions and China’s resource allocation. As a reflection of the relationship between labor and economic and social interests in a period, the income gap is bound to be affected by Confucian culture. Based on the above, this paper examines the impact of Confucian traditional culture on the income gap and its internal mechanism from the perspective of informal institutions by taking cities at and above the prefecture level in China from 2012 to 2019 as the research object. The study finds that Confucian culture has an obvious “improvement effect” on the income gap. That is, the greater the impact of Confucian culture, the more conducive to improving the internal income gap. Further research shows that Confucian culture mainly affects the income gap through improving the tax structure and promoting innovation. At the same time, the improvement effect of Confucian culture on the income gap is more obvious in the areas with a higher degree of marketization and a less impact from other cultures, and the regional characteristics are more obvious in the north. This paper reveals the function mechanism of Confucian culture to improve the income gap from the macro level, and provides an empirical basis for seeking the realization path with Chinese characteristics and carrying forward the Chinese excellent traditional culture in the construction of common prosperity.