Why do people wear elaborate masks and costumes to celebrate Halloween?
Did people dress up during the pagan festivals that inspired Halloween, or is the practice a modern addition?
On the Wikipedia page for Halloween Costumes it says:
An early reference to wearing costumes at Halloween comes from Scotland in 1585.
Looking at the external links on the page I found something that sort of explains this.
As the centuries wore on, people began dressing like these dreadful creatures, performing antics in exchange for food and drink. This practice is called mumming, from which the practice of trick-or-treating evolved.
This seems to be why we do it. In Samhain (the Celtic pagan ritual from which a large portion of Halloween tradition is derived), people would dress up. So yes, the tradition does come from the pagan holidays that it is based on.