Ok. I figured this problem out.
The key thing is that the vnc password is not updated correctly.
The solution is to open gconf-editor and edit desktop > remote_access > 
vnc_password.
The vnc_password field is base64-encoded. Navigate to this page: 
http://www.javazoom.net/services/base64/base64.jsp, type your password and let 
the applet encode it. Paste the base64-encoded password in the vnc_password 
field and voila!
It works with and without SSH tunnel.
You don't have to logout/login, it just works!

Hope this help you.

P.S. I'm using feisty up-to-date.

-- 
Can't change vino password in 7.0.4
https://bugs.launchpad.net/bugs/141032
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