For Ubuntu 9.10, the Ayatana Project together with the Canonical Design Team will focus on fixing some of the "paper cuts" affecting user experience within Ubuntu. Here I offer an example of a paper cut and a preliminary definition of the term.
Let me introduce you to Lauchpad bug #302231, the perfect example of a paper cut. In the screenshot below, you can see GNOME Do's preferences window, opened to the Plugin configuration tab with the plugin search field highlighted in green. When a user opens Do's preferences window, most of the time that user is going to enable, disable, or configure a plugin. For this reason we worked very hard to make the Plugin configuration tab easy to understand, and not only simple to use but fun to use as well. We also select the Plugin tab by default whenever you open the preferences window.
Here's where the paper cut fits in–the search field lost default focus at some point during development, and two releases were made in which users had to click on the search field to focus it nearly every time they configured plugins. This is a very small detail, and it was extremely simple to remedy, but it slipped through the cracks for two successive releases before I sat down to fix it. Part of the reason I put off fixing it is because it seemed inconsequential, as the amount of programming required to fix it was so small compared to other bugs in the application. Also, as with many other paper cuts, users (myself included) became habituated to this annoyance, learning to ignore and work around it.
Even though this was a small bug with a trivial fix, fixing it improved the usability of the application dramatically. Once fixed, the experience of configuring the application became significantly less painful, and this bolstered an aura of usability surrounding the entire application.
From this experience, I would say that a paper cut is a bug that will improve user experience if fixed, is small enough for users to become habituated to it, and is trivial to fix.