The administration is exploring a major conversion of the tax system--the replacement of the income tax with a consumption tax--that on first glance would seem to have strong political and economic appeal.

On second glance, it raises a hornets' nest of problems. These include the prospect of continued high marginal tax rates, the possibility that a home buyer would have to pay taxes in one year on the entire cost of the acquisition and transition difficulties that could permit the very wealthy to escape taxation altogether for a number of years.

In theory, a consumption tax would be an extremely simple proposition: money spent for personal expenditures, including fringe benefits, would be taxed, while money saved or invested in income-producing assets would be exempt.

In one fell swoop, the entire system of deductions, credits, deferrals, depreciation schedules, inventory accounts, corporate income taxes, capital gains would be wiped off the books and replaced by a three-step accounting process applicable to rich and poor alike.

The administration has not written out a consumption tax bill, and no specific proposal is before Congress. But two administration officials, John E. Chapoton, assistant treasury secretary for tax policy, and Martin Feldstein, chairman of the Council of Economic Advisers, have outlined a consumption tax that would work about as follows:

An individual would first calculate total income for the year. This would include wages; the value of fringe benefits; all the proceeds (not just the profit or gain) from the sale of a house, stock, car or other assets; dividends and interest; and, in the most radical departure from the current system, borrowed money.

From this figure, the individual could deduct money put into savings accounts; the cost of purchasing stock, bonds, mutual funds and other income-producing investments; the portion of fringe benefits going into pension accounts; and interest and principal paid on loans.

The resulting amount--money that was not saved and was presumably spent on food, clothing, rent and other such items--would be taxable.

The rate system to be established is a political decision; the designers of a number of consumption tax schemes have used a system of personal exemptions and graduated rates in an attempt to defuse the most common criticism of such proposals: that they are inequitable, in that they protect wealth and fall relatively harder on the poor than on the better-off.

Critics acknowledge that this problem may be solvable, that it may be possible to design a consumption tax whose burden is distributed about the same as the existing sytem. But proponents and opponents agree that there are a number of other major problems. These include:

* If the system were to be converted to a consumption tax, that would mean that persons spending their current savings, which were acquired under the income tax, would be subject to double taxation. The first levy would occur when they paid income tax under the old system before they put the money in the bank. The second would come in the new system when the money was withdrawn for personal expenditures.

It is possible to exempt from the consumption tax savings that had been subject to the income tax. For the very wealthy, however, this would create the potential of allowing the most affluent segment of society to go untaxed entirely for a number of years if all its consumption was financed from early savings, thereby avoiding taxation, while new income was put into new savings and investments where it would go untaxed.

* A pure consumption tax would suggest that someone buying a home, a personal expenditure, would have to pay tax on the entire amount, both the down payment and the amount financed by mortgage, since borrowed money would be subject to taxation.

Again, proponents argue that exemptions and modifications could be made for home, and possibly car, purchases. In a system with very few exemptions, however, the granting of a special tax break to real estate (or automobiles) would create significant distortions of investment decisions.

* The consumption tax could become a burden falling most heavily on those who can least afford to pay. An unemployed person forced to go into savings to pay for necessities would face the prospect of little or no income, but also paying taxes on the use of his savings to keep food on the table and the rent up to date. Similarly, the retired elderly in many cases spend a higher percentage of their income on consumption than the middle-aged.

* Since corporations do not make personal expenditures, most consumption tax proposals call for the elimination of the corporate tax. Such a step might have economic and accounting logic, but politically it would be a difficult step at a time when even business lobbyists acknowledge that there is very little public support for new tax breaks for corporations.