In large bowl, beat butter and sugar with electric mixture until light and fluffy. Beat in egg and extracts. Mix flour, baking powder, and salt. Do not chill. Divide dough into 2" balls. Flour surface, roll to 12" diameter, and 1/8 inches thick. Dip cutter in flour. Cook approximately 8 minutes each sheet, until edges are lightly browned.
Cool baked cookies on a rack. Mix powered sugar and milk in a mixing bowl, thinning until the right consistency. Divide into small bowls and add colored food paste. Mix until colors are evenly blended. Place each color in a piping bag and decorate completely cooled cookies.