Things become clearer when we remember two's complement. The negative of a number is just 1 plus the bitwise NOT of that number. Thus,
(b - x) = (b + ~x + 1)
Let's work through an example of one iteration of the algorithm. Then I'll explain the logic.
Suppose
x = . 1 1 . . 1 .
b = . [.][.] . . [1] .
^
where . denotes zero.
Let's define "important" bits to be the bits that are in the same position as a 1 in x. I've surrounded the important bits with [], and I've marked the right-most important zero in b with ^.
~x = 1 [.][.] 1 1 [.] 1
~x + b = 1 [.][.] 1 1 [1] 1
~x + b + 1 = 1 [.][1] . . [.] .
(~x + b + 1) & x = . [.][1] . . [.] .
Notice that ~x + b always has a string of ones to the right of the right-most important zero of b. When we add 1, all those ones become zeros, and the right-most important zero becomes a 1.
If we look only at the important bits, we see that b transformed from [.][.][1] into [.][1][.]. Here are what the important bits will be if we continue:
[.][1][.]
[.][1][1]
[1][.][.]
[1][.][1]
[1][1][.]
[1][1][1]
If we write the important bits side-by-side like this, as if they were a binary number, then the operation effectively increments that number by 1. The operation is counting.
Once all the important bits are ones, (b - x) & x simply becomes (x - x) & x, which is 0, causing the loop to terminate.
By that point, we've encountered all 2^n possible values of the n important bits. Those values are the subsets of x.