I found that the palette worked the very first time I tried, provided I first selected some text (in Text style; I didn't try other styles) and then clicked the palette button, but not if I did not select anything beforehand. But this was after evaluating the code in v10 and directly using the palette notebook created; have you tested this? However, when I tried this again, I found the same issue that you did and I was not able to recreate a successful outcome. That I found odd. So I tried a few things, including replacing the RawData[...] with Cell[RawData[...]] and removing the Saveable option completely. That seemed to work (see attached file) but I did not manage to save the palette generated.
There is a separate procedure to install palettes, assuming you are successful in re-creating a palette that works (you could try simply replacing the code of the palette though a safer way would be to install a fresh palette, perhaps more seasoned Mathematica users might be sure of the best method). There could be an issue with saving the palette created with your code as you explicitly prevent saving of the palette using the un-integrated option Saveable.
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