The original intention of layers was different to the Photoshop model - we were considering taking ArtRage in a fairly different direction. This led to some limitations in the painting model that prevented layers being able to be composited together at varying transparency and still be able to be edited.
After much discussion here we decided the traditional use of layers is more aligned with what users would expect, so we will be making layer compositing work as you originally describe - with composited layers retaining their transparency after merging.
This will be part of a free update to ArtRage - probably part of the next 'dot' release of ArtRage.
AndyRage's mantra for graphics engine code:
"Sure - how hard can it be?"