Paxson, a guard-forward and the son of former NBA player Jim Paxson, Sr., played college basketball at the University of Dayton. When the older Paxson tried out for the Dayton Flyers, he couldn't afford to buy athletic shoes, so athletic director Thomas Frericks loaned him a pair. Paxson was a three-time team MVP and earned All-America honors as a senior after averaging more than 23 points per game. He also averaged 17 points as a junior and 18 points as a sophomore at Dayton.
The 6-foot-6 Paxson was an NBA All-Star in 1983 and 1984. He also earned All-NBA Second Team honors in 1984 after averaging 21 points per game. He spent nine seasons with Portland (1979-1988) and, after being traded to Boston in February 1988, spent two full seasons with Boston (1988-1990). When he was traded from Portland, he left as the team's all-time leading scorer.
After retiring in 1990 at the age of 32, Paxson joined Portland's front office as assistant general manager. In September 1998, he was named vice president of basketball operations for the Cleveland Cavaliers. He was promoted to general manager in 1999, serving in that position until he was fired in April 2005. The Cavaliers won 185 games and lost 307 games in the six years Paxson was general manager.
In July 2006, Paxson, the older brother of former Chicago Bulls guard and current Chicago Bulls Executive Vice President of basketball operations John Paxson, was hired as a consultant for the Bulls. Paxson was inducted into the Oregon Sports Hall of Fame in 1998. In 2004, he was named to the University of Dayton's All-Century Team.