A lot of vitriol in response to this (specifically, the uncritical accusation that this is "bullshit"). But you're right on.
The problem is, you can't take an existing current public school system (of the worst kind), flip a switch that says advanced kids have to teach the less advanced kids, and expect things to work. It requires a total rethinking of the school as a small society engineered for learning from each other.
To those that say teaching each other is a recipe for abuse, or that it doesn't happen: that's only true when you've set up school as a simple game defined by scores on homework assignments.
Ideas worth trying (some stolen from my fourth/fifth-grade class, whose teacher, Kent Daniels, actually tried many of these things out with success):
* Replace lecturing, for the most part, with individually adaptive material, aided by computers where appropriate, housed in a one-room schoolhouse with kids of many ages and skill levels.
* Allow for lots of individualized creative work. Read a book of your choice and present it to the class, write about it, whatever. Program a robot. Etc.
* Eliminate homework as a basis for grades. Maybe eliminate actual home-work and replace it with in-school work; and maybe eliminate grades entirely. Schoolwork should be a mechanism for learning, not a graded success metric, and this eliminates the biggest problem with the next item.
* Encourage kids to help each other out. Teaching others is the perfect way to better master the material, develop effective communication skills, and other things that simply getting the high score on a math test doesn't do.
* Turn the teacher into a roving mentor: their job is to get an individualized sense of how everyone is doing, to help kids, and to help kids help each other. Their job is to be a better feedback control system than testing could ever be.
* Monitor the teachers in much the same way the teachers are monitoring the kids: not with standardized testing, but with empowered professionals. Create an adaptive, fuzzy hierarchy of learning and teaching.
* Experiment with different kinds of testing at multiple scales. Some structured evaluation will probably serve as a nice complement to this fuzzy system.