Top income inequality affects the balanced and full development of social economy. This paper constructs a theoretical model of the impact of individual income tax and transfer payment on top income inequality, and empirically analyzes the impact of China’s fiscal system (individual income tax and transfer payment) on the top income inequality using micro database. Theoretical analysis shows that the higher tax rate and the less subsidy the top earners receive, the lower top income inequality. At the same time, the faster the top earners’ income growth rate and the greater income fluctuation, the greater top income inequality. The empirical results show that the effective tax rate faced by the top earners is inversely correlated with top income inequality, and the degree of subsidy, income growth rate and income standard deviation are positively correlated with top income inequality. China’s fiscal system has a limited effect on top income inequality, and the top income inequality is more serious after considering the hidden income. The fiscal system of developed countries has a significant effect on the top income inequality, while the fiscal system of developing countries has a limited effect on the top income inequality. China should continue to improve its personal income tax system and transfer payment system, standardize the order of income distribution, appropriately reduce hidden income, and improve China’s fiscal system by learning from the experience of foreign countries in constructing the fiscal system, so as to finally alleviate top income inequality.