The brackets are not set correctly. Try this:
read POSIX file (x & "/pass.txt")
or
do shell script "cat " & quoted form of (POSIX path of (path to desktop) & "test/" & username & "/pass.txt")
There are many other issues in the script anyway. Just a few tips, use...
-quoted form of pathes
-the -p option for mkdir
-the with hidden answer
option for password entry