I agree with the 6'5" American guy - it doesn't necessarily need to be a dramatic overhaul.
I kind of like the idea of turning the Arb 3 year (and Arb 4 for Super 2 players) into a form of Restricted Free Agency like in hockey. Any player in Arb 3 or Arb 4 can be given a one year offer sheet by any other MLB team. If the player accepts the offer sheet, the current club gets a right of first refusal - if they match the $$$ they can retain the player.
The effect of that ^ would be more money for the players, obviously. But the owner would still technically have the same duration of control, it would just be less absolute at the tail end.
Another idea that I kind of like is a tax during arbitration for surplus service time. I would consider surplus service time to be the years after a whole year. When a team controls a player for seven years after gaming his service time, they end up with something like 6.170 years of service time control over him. I think those hangover days should somehow turn into a tax, payable to the player, on top of their arbitration salary. So sure, you can keep Vlad down three weeks in order to steal a year of free agency from him, but you'll have to pay him a tax on top of his Arb 3 and Arb 4 salaries in order to do that.
Depending on how you do the tax calculation, you could actually incentive late-season callups. Say if "surplus service time" of 60 days or less was not taxable - you'd get a lot of August call ups.
Edit: I think I am a genius, MLBPA or MLB should hire me