> The exam will wash out the 50-70% of people who are needed as temp TA labor but whom the department has no intention of advising through to a Ph.D.

At which department?

Speaking as a math professor in an American research university -- this is unusual. Pass rates at most places are reasonably high, and professors hope that as many people as possible pass.

It is true that grad students are expected to TA (if they want funding); usually grant funding is not available to support them. But generally the teaching burdens are relatively modest, around ~15 hours a week including grading and office hours.