Will newspaper covering a cake pan catch fire in the oven?
Cakes are not normally baked a temperature high enough to ignite paper, although the newspaper will probably singe and brown, and possibly produce an unpleasant odor--some of which may be transferred to the cake.  If you are going to go this route, I would recommend using baking parchment, which is intended for the heat of the oven, not newspaper.

There are several more common methods for ensuring even cake layers:


Simply cut off any doming with a knife
Use an inverted  flower nail at the center of the pan to better conduct the heat of the oven to the center of the cake
Use cake strips to cool the edge of the pan, again evening out the cooking


In truth, unless you have a very special application, cutting off any doming is often the simplest, most straight-forward solution.