Let's start with your discussion of Paul.
I find your comparison of Paul and Lao Tzu interesting, and I agree it represents two very different approaches. Lao Tzu's approach, as you describe it, reminds of the great American myth of the "noble savage." If you recall, this myth posited that natural man (or woman) was uncorrupted until forced into contact with modern society. You can find echoes of this idea in something as simple as Burrough's stories of Tarzan, especially the first in the series: Tarzan of the Apes.
Human experience teaches a different lesson: humanity is complex, a blend of the altruistic and nakedly self-interested. Insofar as I can tell, we have no reason to believe humans naturally practice selflessness, duty, compassion and simplicity to the exclusion of greed, violence, and the like.
Paul argues that we are law breakers. When we finally "see" the law, we become aware of our condition and our habitual practice of our sin. To put it another way, we see that we are sinners because, well, we sin.
I think you may misunderstand Paul at one point. You write: "...Paul seems to condemn the flesh and root evil in biology, his fellow rabbis, following the Torah, root evil not in the flesh but in the human imagination and therfore articulate a more psychological approach to good and evil." Paul uses the term "flesh" (sarx) to describe the totality of a human being: mind, body, spirit, imagination, or any other set of terms you may choose to use. Sin puts down roots in one's total being. Paul's understanding of good and evil is profoundly psychological. He can lament how he sees and even wills the good yet turns around only to find that he has done precisely the opposite. That's a fair description of the human situation!
It seems that Paul assumes Yetzer haTov and Yetzer haRah, but he also believes the fight is rigged in favor of Yetzer haRah. Paul takes seriously the fallenness of society and concludes we are corrupted by it long before we become responsible for our actions. He also assumes that "powers" are in play. Traditional Christian commentators describe those powers in terms of demonic forces; more contemporary scholars speak of the impersonal power of evil inherent in institutions and the like. Regardless of the particulars, Paul feels the deck is stacked against us when we are born and that the "house always wins." I find his viewpoint starkly realistic.
His hope lies with God, particularly God as he has experienced God in Jesus. Paul assigns both personal and cosmic signficance to Christ, but the point to be made here is that the apostle finds in Jesus a kind of new life, which can challenge the power of sin and even defeat it when all is said and done.
"You shall not covet" triggered one of several transformations that seem to have occured to Paul. In his case, it forced him to abandon what seems to have been excessive confidence in human nature (or, at least, himself) in favor of a more realistic assessment of human potential.